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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

February 13,

1974

TABLE OF CONTENTS

. . .
Summary and GNP outlook
Industrial production . . . . . . .
.. . . . .
Retail sales
. . . ...
Unit sales of consumer durables . .
Consumer surveys . . . . . . . . .
. . . . . . ...
.
Inventories
Manufacturers' orders and shipments
. . .
Cyclical indicators . . . .
. .

Construction and real estate

.
Labor market ......
..
...
Earnings . . . ..
.
Productivity and costs
Collective bargaining . .
Consumer prices . . . . .
Agriculture . . . . . . .

Page No.

Section
I

DOMESTIC NONFINANCIAL SCENE

.
.
.
.

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

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

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

.
.
.
.

. .
. .
.....
. .

-18

-20
-23
-23
-25
-28
-30

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

- 1
- 4
- 4
-11
-14
-16
-17
-20
-23
-26
-27

DOMESTIC FINANCIAL SITUATION
Summary and outlook . . . . . . . . .
Monetary aggregates . . . .........
Bank credit . . . . . . . . . ..........
Nonbank financial intermediaries
. .
Consumer credit . .
. . . . .
.
.
Short-term interest rates
. ....
Treasury coupon markets
. . .
.
.
Private long-term securities markets
Mortgage market . . . . . . ..........
Agricultural finance . . ..
. . .
.
Federal finance
.
.
. .
. . ...

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

. . . . .
.
.
.
.

- 1
- 8
- 9
-10
-12
-13
-16
-17

INTERNATIONAL DEVELOPMENTS

III

Foreign exchange markets . .....
..
. .
. . . ..
.
Euro-dollar markets . . . . . . . . . . . . . . .
. . ..
. . . . . . . .
. . . . . . .
U.S. balance of payments
. .
. .
. . . . . .....
U.S. foreign trade . .

- 3
- 4
- 8
-10

Current external account positions
of major foreign industrial countries . .
APPENDIX A:

The New Federal Budget . . . .

. . . .

. . . . .

...

-15

. . . .

-Al

DOMESTIC NONFINANCIAL
SCENE

February 13,

1974

I--TSELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Release
Date

Data

Jan.

2/1/74
2/1/74
1/28/74
2/1/74
2/1/74
2/1/74

90.5
5.2
2.9
76.4
19.9
56.4

Jan.
Jan.

2/1/74
2/1/74

36.6
4.02

Period

Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At Annual Rates)

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

Jan.

Jan.
Dec.

2/1/74
1/31/74

39.9
125.5

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

Jan.

2/15/74
2/15/74
2/15/74
2/15/74
2/15/74

125.7
129.2
127.2
80.6
130.3

-9.5
-15.6
- .9
-4.4
-6.4

138.4
151.6
126.7
143.8

6.5
3.2
8.'6
6.7

Jan.
Dec.
Jan.
Jan.

Jan.
Jan.
Jan.
Jan.

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

Dec.
Dec.
Dec.

12/21/73
12/21/73
12/21/73
12/21/73

3/
Personal income ($ billion)-

Dec.

1/16/74

Dec.

1089.6

6.81/

48/

2.8-4.1
-7.5
-2.8
37.0/
.0
1/
40.7-2.9

Ratio:

Mfrs.' durable goods inventories to unfilled orders

Retail sales, total ($

bil.)

GAF
3/
Auto sales, total (mil. units)Domestic models
Foreign models
3/
Housing starts, private (thous.)- /
Leading indicators (1967=100)

Actual data.

3.0-

.0
-1.0
.4

2.9
2.6

3.0

4.0

36.9 1 /
6.6

40. 1/
3.5

40.31/
6.1

37. 0

-4.1

-10.3
3.2
3.0
-2.4

10.8

Annual Rates)
-2.1
.9
3.0
-13.6

Dec.
Dec.
Dec.
Dec.

2/14/74
1/31/74
2/14/74

1.44
1.60
1.29

1/
1.411/
1.541.28-

Dec.

1/31/74

.715

.701/

1
.728&

Jan.
Jan.

2/11/74
2/11/74

43.0
11.3

Jan.

2/11/74
2/11/74
2/11/74

9.4
7.7
1.7

Dec.

Jan.
Jan.

2.5
2.2
-2.4

-2.9
-.

1,355
-20.1
1/17/74
.1
Dec.
1/31/74
168.7
ii
W
Not seasonally adjusted. 3/
At annual rate.
Dec.

8.8
1.0
4.7
8.8

41.4
13.0
11.6
1.4

-6.6
-8.3
-3.1
-37.2

2.9
-. 5

20.0
5.0
6.2

1/31/74
1/31/74
1/31/74
1/31/74

Dec.
Dec.

Inventories to sales ratio:

Manufacturing and trade, total
Manufacturing
Trade

4.11/

4.6 ;
2.8-

11.8

11.3
(Not at

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

3.51/

i/
59

1.29- /

- .1
2.2

7.9
9.6
16.1
-25.9
1/
1.45y
1.6-/
1.30-

.857-/
5.7
7.3

-8.1
-12.0
14.8

-22.9
-25.4
-9.0

-24.9
2.4-

-42.8
9.9
i

I-

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity in the early weeks of this year has been
weaker than the staff had anticipated.

Industrial production is esti-

mated to have declined 0.8 per cent in January, following a drop of
0.6 per cent in December.

Once again, the reduction reflected primarily

sharp cuts in auto output and reduced use of electricity and gas,
mainly by residential and commercial customers.

But the auto supplying

industries appear to have been more adversely affected in January than
in December, and output of business equipment is estimated to have
changed little at a level slightly below the November high.
The labor market has also weakened considerably further.

Non-

farm payroll employment fell sharply in January--by over 250,000-- and
the declines were widespread by industry.

Industries in which activity

is closely related to the availability of gasoline--such as auto
production and sales, gas stations, and motels--were particularly hard
hit.

The manufacturing workweek also fell sharply.

The unemployment

rate rose to 5.2 per cent in January from 4.8 per cent in December, as
the labor force increased substantially.
Unit sales of automobiles last month declined a little
from the depressed December level,

further

to an annual rate of 9.4 million

(including 1.7 million imports).

Sales of large cars were bolstered

by substantial rebates to dealers

late in

the month.

Apart from the

automotive group, retail sales in January recovered about 1-3/4 per cent
from a December level that was revised down considerably; in real
terms, the January level was probably below the fourth quarter average.

I - 2

Wage rates in the private nonfarm economy continued to rise
in January; since early last year, the hourly earnings index has
increased at a 7 per cent annual rate.

In the fourth quarter, a decline

in productivity and a continued sharp rise in compensation per manhour
resulted in an 11 per cent annual rate of increase in unit labor costs.
In the aluminum industry--which is

likely to establish a pattern in

the can and steel industries--the recently signed contract provided
for a basic wage rate increase plus full cost of living adjustments
and substantially liberalized pension benefits including an innovative
cost of living adjustment provision for retirees.
Prices are continuing to rise rapidly at both retail and
wholesale levels.

Prices received by farmers showed a steep increase

from mid-December to mid-January, following an interval of generally
sustained decline.

Wholesale and retail prices of gasoline have risen

substantially since the last official reports.

In December,

the con-

sumer price index rose at a 7 per cent annual rate, bringing the
increase from a year earlier to almost 9 per cent.

Outlook.

Staff assumptions with regard to oil supplies are

unchanged from last month--we still assume a short-fall of 2 to 2-1/2

million barrels per day.
however.

Several other assumptions have been modified,

(1) Growth in M 1 is assumed to average about 5-3/4 per cent

over the year.

This rate of growth appears likely to be associated

with some decline in short-term interest rates in the first half, when
nominal GNP growth is
term rates thereafter.

relatively slow,

and with some rise in short-

(2) Account has been taken of the new budget

I- 3

for fiscal 1975.
outlays in

However, recent expenditure patterns suggest that

the first

half of calendar 1974 will fall short of those

implied in the budget, and we have incorporated a lower level into the
staff projection.

For the second half of calendar 1974, the staff is

projecting a somewhat faster rise than implied by the budget, so
that our fiscal year totals conform to those of the budget.

On taxes,

the staff has not incorporated the recommended "emergency windfall
profits tax" on petroleum and products, which seems unlikely to pass the
Congress.

(3) The staff assumes that price and wage controls--except

in health services, petroleum and possibly a few other industries-will be ended by April 30, when the enabling legislation expires.
Real GNP is

now projected to decline at an annual rate of

3 per cent in the first quarter, compared with a 1-1/4 per cent rate
of decline expected last month.

Nominal GNP is projected to increase

by only $16 billion, rather than $22 billion.

Prices are still

expected to increase rapidly, with the private GNP fixed-weight index
up at an annual rate of 8 per cent.
Declines in real purchases in the first quarter appear to be
concentrated

durable goods,

consumer buying--particularly automobiles and other
foods,

gasoline and services--and in

struction activity, which is down sharply further.

residential conA further step-

up in inventory investment appears unlikely this quarter following the
substantial fourth quarter increase.

Inventories in some lines will

rise faster due to a declining pace of sales,

but the fourth quarter

buildup in auto stocks apparently will not be repeated--auto production

I-4

has been cut back to a level at or below the current sales rate.
Except for the weaker first quarter, the projection for 1974
is little changed from that of a month ago.

A small further decline

in real activity in the second quarter is expected to be followed
by relatively slow growth in the last half of the year.

The unemploy-

ment rate is now expected to average somewhat higher, and to exceed
6 per cent by the fourth quarter, because of the weaker first quarter.
Consumer spending is expected to firm somewhat in the spring,
when the decline in auto sales bottoms out, and residential construction
activity is expected to reach a low in the second quarter.

In the

second half of the year, real consumer purchases are projected to rise
more strongly, with auto sales turning up as more small cars become
available.

Housing starts and residential construction activity are

projected to increase moderately, in response to a more ample volume
of mortgage funds and gradual adaptations to changed energy supplies.
Price increases are expected to be large in the first half
of the year, raising the private fixed weight deflator at a 7-1/2
per cent annual rate.

This is the period in which the bulk of the

increase in gasoline prices is

expected to occur,

and when food prices,

given the restricted supplies of meat, are likely to rise sharply
further.

The staff has raised the projected rate of price increase in

the second half of the year to an average annual rate of 5-J/4 per
cent,

from 5-1/2 per cent,

reflecting the assumed termination of the

controls program on April 30, instead of the more gradual decontrol
earlier anticipated.

During the second half the basic factor raising

prices is expected to be pressure from rising unit labor costs.

I-5
STAFF GNP PROJECTIONS
Per cent change annual rate
Changes in
nominal GNP
($ billions)
1/16/74 2/13/74

Real GNP
1/16/74 2/13/74

Gross private
product
fixed weighted
price index
2/13/74
1/16/74

Unemployment
rate
(Per cent)
2/13/74
1/16/74

78.3
99.7
132.7
101.1

78.3
99.7
133.0
97.2

3.2
6.1
5.9
.6

3.2
6.1
5.9
.3

4.6
3.2
5.9
7.1

4.6
3.2
5.9
7.3

5.9
5.6
4.9
5.6

5.9
5.6
4.9
5.8

1973: I
II
III
IV

43.3
29.5
32.5
28.0

43.3
29.5
32.5
29.5

8.7
2.4
3.4
1.0

8.7
2.4
3.4
1.3

7.0
7.9
7.6
7.0

7.0
7.9
7.0
7.6

5.0
4.9
4.8
4.7

5.0
4.9
4.7
4.7

1974: I
II
III
IV

22.0
20.5
23.0
30.5

16.0
20.5
24.0
32.0

-1.3
- .7
1.3
2.8

-3.0
- .7
1.3
3.0

8.0
6.9
5.5
5.5

8.0
7.0
5.8
5.7

5.2
5.5
5.8
6.0

5.4
5.8
6.0
6.2

133.3

134.8

3.8

3.9

7.4

7.5

- .6

6.5

6.6

1.3

1.5

19711/
19 7 2 -'
19731974

hange:

72-IV to
73-IV

73-IV to
74-IV
96.0
92.5
.5
I/
Actual.
2/ Commerce preliminary estimates,

I-6

CONFIDENTIAL

February 13,

1974

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

1973

1974
Proj.

1974
Projection
II
III

1973
III

1288.2
1280.8
1003.6
999.0

1385.4
1375.8
1068.7
1072.2

1304.5
1299.8
1020.8
1013.2

Personal consumption expenditures
Durable goods
Nondurable goods
Services

805.0
131.1
336.3
337.6

875.7
126.9
376.8
372.0

816.0
132.8
341.6
341.6

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

201.5
58.0
136.0
7.4
6.7

206.1
48.4
148.1
9.6
9.6

Net exports of goods and servicesExports
Imports

4.6
101.3
96.7

-3.5
121.6

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

277.2
106.9
74.2
32.7
170.3

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

IVp

1335.0
1040.6
1039.9

1370.5
1360.0
1057.0
1058.5

1394.5
1387.0
1076.5
1081.9

1426.5
1421.0
1100.5
1108.3

829.0
126.8
351.1
351.2

847.4
125.0
362.9
359.5

865.7
125.0
372.7
368.0

884.7
127.0
381.4
376.3

904.9
130.5
390.1
384.3

202.0
59.2
138.0
4.7
3.2

211.2
54.2
141.1
15.9
14.9

207.5
48.5
144.0

204.7

15.0
16.0

203.3
45.8
147.0
10.5
11.0

208.9
51.4
152.0
5.5
4.5

8.
113.5105.6

.7
116.2
115.5

-1.5
121.4
122.9

123.1

125.1

7.6
104.5
97.0

128.5

-7.8
125.7
133.5

307.1
115.6
78.2
37.4
191.5

279.0
106.8
74.2
32.7
172.2

294.4
107
285 . 8.1/ 110.9

74.033.8
178.0

35.5
183.5

303.0
114.4
77.4
37.0
188.6

310.5
116.5
78.5
38.0
194.0

320.5
120.5
81.5
39.0
200.0

837.3
153.9

839.5
165.0

841.3
155.1

844.1
158.0

837.7
161.2

836.1
163.9

838.9
166.2

845.2
168.8

1035.5
691.5
882.6
53.8
6.1

1132.2
745.9
961.9
59.5
6.2

1047.1
699.3
891.1
51.1
5.7

1079.2
717.6
918.0
63.4
6.9

1095.4
725.2
930.5
57.5
6.2

1119.5
736.0
951.9
59.9

1144.5
751.8
972.6

6.3

1169.2
770.5
992.7
59.9
6.0

121.9
110.3

129.0
110.6

128.0
110.2

123.0

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

126.4
109.0

109.3

121.5
109.6

120.5
110.0

122.5
112.2

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

265.2
264.7
.5

288.9
300.5
-11.6

269.5
265.6
4.0

275.5
272.4
3.1

281.7
282.6
- .9

285.93/
303.8
-17. 9

290.7
304.3
-13.6

297.1
311.1
-14.0

-2.1

-1.7

1.7

3.9

Gross National Product
Final purchases
Private
Excluding net exports

Personal income

Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)
Corporate profits before tax

High employment surplus or deficit (-)

-2.0

-. 8

1334.0
1318.1,1
1032.3 /
1024.3

1350.0

75.4

-9.1

47.7
149.5
7.5
7.0
-5.4

60.8

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

11.0

3.9

10.4

8.4

7.6

4.9

2.9

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

91.0
2.3
88.7
4.9

93.4
2.3
91.1
5.9

91.3
2.3
89.0
4.7

92.2
2.3
89.9
4.7

92.9
2.3
90.6
5.4

93.3
2.3
91.0

93.8
2.3
91.5
6.2

Nonfarm payroll employment (millions)

75.6
19.8

76.3
19.7

75.7
19.8

76.6
20.1

76.3
19.9

76.2
19.7

93.6
2.3
91.3
6.0
76.2

Capacity utilization, mfg. (per cent)
Major materials (per cent)

125.6
83.0
95.1

125.5
79.9
93.1

126.7
83.3
96.0

127.1
82.8
96.0

125.7
81.2
94.5

125.0
79.9
93.0

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

2.04
11.44
9.67
1.77

2.03
11.74
1.11
1.63

1.57
10.08
8.44
1.65

Manufacturing

Industrial production (1967 = 100)

1.60
9.25
7.50
1.75

5.8

1.48

1.50

9.00

8.75
7.00

7.25
1.75

1.75

19.6

76.4
19.6

125.2
79.3
92.5

126.1
79.1
92.4

1.65
9.25
7.50
1.75

1.75
10.00
8.25
1.75

Includes effects of shipments of military equipment and supplies to Israel; these are now estimated at
$2.8 billion annual rate and considered as a sale, with $2.4 billion coming from U.S. military stocks and
thus reducing defense purchases by that amount.

6.1
Net exports of g. & s. (bal. of paymts.)
101.9
Exports
95.8
Imports

1.2
122.9
121.7

8.6
104.8
96.2

12.6
114.8
102.2

5.4
117.5
112.1

3.2
122.7
119.5

- .7
124.4
125.1

-3.1
27.0
1;
130.1

s
3/ Includes a one-time payment of a grant to India of $2.2 billion ($8.8 billion annual rate) worth of rupees as
part of an overall rupee debt settlement.

I-7
CONFIDENTIAL - FR

February 13, 1974
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
197 3 p

1974
Proj.

1973
III

IVp

1974
Pro ection
II
III

------------------------- Billions of Dollars-----------------------Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential fixed investment
Business fixed investment
Government
Federal
State and local
GNP in constant (1958) dollars
Final purchases

Private

133.0
1.4
131.7
109.5
9.2
100.3
78.5
13.7
36.4
28.4
4.0
17.8
22.2
2.5
19.8

97.2
2.2
95.0
65.1
-8.1
73.2
70.7
-4.2
40.5
34.4
-9.6
12.1
29.9
8.7
21.2

32.5
.2
32.3
28.6
4.8
23.8
20.4
.0
11.3
9.0
- .4
3.9
3.7
- .5
4.2

29.5
11.2
18.3
11.5
.4
11.1
13.0
-6.0
9.5
9.6
-5.0
3.1
6.8
1.0
5.8

16.0
- .9
16.9
8.3
-7.3
15.6
18.4
-1.8
11.8
8.3
-5.7
2.9
8.6
3.1
5.5

20.5
-4.5
25.0
16.4
-2.2
18.6
18.3
.0
9.8
8.5
-2.7
3.0
8.6
3.5
5.1

24.0
-3.0
27.0
19.5
-3.9
23.4
19.0
2.0
8.7
8.3
1.9
2.5
7.5
2.1
5.4

46.6
46.0
44.2

2.2
.6
-2.7

7.0
7.3
7.5

2.8
-5.1
-4.9

-6.4
-6.2
-7.2

-1.6
2.1
.2

6.3
4.3
3.1

4.9
5.2
3.3

6.2
7.7
6.5

7.2
8.2
7.6

9.5
10.2
9.2

32.0
-2.0
34.0
24.0
-2.4
26.4
20.2
3.5
8.7
8.0
3.7
2.5
10.0
4.0
6.0

1/
------------------------- Per Cent Per YearGross National Product
Final purchases
Private

11.5
11.5
12.2

7.5
7.4
6.5

10.6
10.6
12.0

9.4
5.8
4.6

Personal consumption expenditures
Durable goods
Nondurable goods
Services

10.8
11.7
12.1
9.2

8.8
-3.2
12.0
10.2

10.7
.0
14.4
11.3

6.5
-16.9
11.6
11.7

9.2
-5.6
14.1
9.8

8.9
.0
11.2
9.8

9.1
6.6
9.7
9.3

9.5
11.5
9.4
8.8

Gross private domestic investment
Residential structures
Business fixed investment

13.0
7.4
15.1

2.3
-16.6
8.9

7.9
-2.7
12.2

19.5
-29.7
9.3

-6.8
-35.9
8.5

-7.9
-20.5
8.6

2.8
17.7
7.0

8.5
34.8
6.9

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

8.7
2.4
- .3
8.6
13.2

10.8
8.1
5.4
14.4
12.4

5.5
-1.9
.0
-4.7
10.4

10.1
3.8
-1.1
14.1
14.2

12.6
12.0
7.8
21.7
12.9

12.2
13.2
11.0
18.0
11.6

10.3
7.5
5.8
11.3
12.0

13.5
14.5
16.2
10.9
13.0

5.9
5.9
6.9
5.3
6.0

.3
.1
- .4
7.2
7.3

3.4
3.6
4.4
7.0
7.6

1.3
-2.4
-2.8/
7.97.6

-3.0
-2.9
-4.1/
8.18.0

- .7
1.0
.1
7.0
7.0

1.3
2.1
1.8
5.8
5.8

3.0
3.9
3.8
6.2'
5.7

Personal income
Wage and salary disbursements
Disposable income

10.3
10.1
10.7

9.3
7.9
9.0

11.5
10.2
10.2

12.8
10.9
12.6

6.1
4.3
5.6

9.1
6.1
9.5

9.2
8.9
9.0

Corporate profits before tax

29.0

-3.6

-3.0

-14.7

-4.8

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

16.0
8.2

8.9
13.5

11.3
5.3

9.2
10.6

9.3
15.8

6.1
33.6

6.9
.7

3.9
4.7

1.0
- .6

2.2
1.2

4.8
6.2

-1.6
-3.9

- .5
-4.0

.0
-2.0

9.0
-13.0
4.6
3.7
9.8

- .1
-21.6
-19.2
-22.4
-1.2

6.0
-30.2
.2
10.1
-41.7

1.3
-64.6
-45.5
-51.5
5.8

-4.4
-20.2
-36.6
-45.5
26.8

-2.1
5.5
-10.7
-13.1
.0

.8
46.4
24.9
31.8
.0

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
3/
Private GNP fixed weighted index-

Nonfarm payroll employment
Manufacturing

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

8.9
10.3
8.5
6.8

-3.3

9.1
9.2

2.8
26.5
36.6
46.4
.0

1/ Percentage rates are annual rates compounded quarterly.
Y/ Excluding Federal pay increases rates of change are: 1973-IV 7.3 per cent; 1974-I 8.0 per cent; 1974-IV 5.7
per cent.
3/ Using expenditures in 1967 as weights.

I- 8

Industrial production.

Industrial production is estimated to

have declined 0.8 per cent further in January when, at 125.7 per cent of
the 1967 average, it was about 3 per cent above a year earlier.

As in

December, a sharp decline in auto assemblies and associated reductions
in output of supplying industries, along with further cuts in electric
and gas consumption by residential and commercial users accounted for most
of the January drop in industrial production.

The other major sectors

of the index, however, failed to show any upward momentum.
Auto assemblies in January were cut back 15 per cent further
to a seasonally adjusted annual rate of 6.9 million units.

Production

schedules for February were set at a 7.0 million unit rate, but parts
shortages because of the truck strikes may lower actual output.

Pro-

duction of household appliances apparently declined in January and output of nondurable consumer goods was also off.

Output of business equip-

ment was about unchanged, and down slightly from November, following a
period of rapid expansion.

Steel production was maintained at record

levels in January but there was a decline in raw steel output in early
February.

Production of consumer durable goods materials dropped

sharply in January, but output of nondurable goods materials changed
little.

Output of construction products was down further.

I-9

INDUSTRIAL PRODUCTION
(1967=100, seasonally adjusted)

Dec.

1974
Jan.

Per cent change
Month
Year
ago
ago

127.5

126.7

125.7

- .8

2.9

118.6
129.8
116.9

123.5
133.4
127.7

122.2
130.9
127.3

121.1
129.2
127.2

- .9
-1.3
- .1

2.1
- .5
8.8

124.5

131.7

131.0

130.3

- .5

4.7

Industry groupings:
Manufacturing
Durables

121.4
117.5

127.4
124.8

126.8
123.9

125.8
122.6

- .8
-1.0

3.6
4.3

Nondurables

127.0

131.3

131.0

130.4

- .5

125.9

Jan.

1973
Nov.

122.2

Total index
Market groupings:
Final products
Consumer goods
Business equip.

Materials

Mining & utilities

127.3

Retail sales.

130.3

2.7

-1.1

Retail sales in January advanced 2.5 per cent

from December; however, this rise only returned dollar volume to the
October 1973 level.

Compared with a year earlier, sales were up 5.6

per cent--the smallest year-to-year gain since December 1970.

More com-

plete sample counts lowered earlier estimates of sales in November and
December,

and the fourth quarter of 1973 is

per cent above the third quarter.

now indicated to be only O.3

Real retail sales in December were

3 per cent below a year ago and fourth quarter sales were down nearly
2 per cent.
Sales of durable goods in January increased sharply, but by

less than the December drop.

Outlays for furniture and appliances were

up 4.4 per cent and sales of the automotive group up 5.6 per cent.
(Unit sales of autos dropped between December and January, and the

higher sales of the automotive group apparently reflect price increases
as well as additional service work.)

Sales of nondurables increased

1.4 per cent, with food sales up twice as fast.

I - 10

RETAIL SALES
(Seasonally adjusted, percentage change from previous period)
1973

1973

III

Nov.

Dec.

1974
January

Total sales

2.9

- .2

-2.3

2.5

Durable

1.9

-3.5

-1.7

-6.2

4.8

3.0

-6.5

-3.5

-9.3

5.6

1.0

-1.1

2.0

-3.8

4.4

.5
.4
-1.3
-2.7

1.4
2.9
.9
1.6

- .8

l.6

2.2

-2.1

2.2

Real sales*
.3
-1.9
-1.1
*Deflated by all commodities CPI, seasonally adjusted.

-3.0

n.a.

Auto

Furniture and
appliance
Nondurable
Food
Gas stations
General merchandise

3.4
4.7
.4
2.0

2.2
1.5
3.6
1.2

.5
- .6
-2.8
3.1

Total, less auto and
nonconsumption items

3.1

2.0

GAF

2.1

Unit sales of consumer durables.

January sales of new domestic-

type autos were at a 7.7 million unit annual rate, down 3 per cent from
December and a fourth lower than a year earlier.
spurt in

There was a moderate

sales during the last 10 days of the month which reflected

in part the offer of substantial rebates to dealers for each large car
sold.

Small car sales in

January accounted for 37 per cent of the

domestic-type market, slightly more than December and well above the 25
per cent in January a year ago.
Stocks of domestic-type autos declined slightly during January
and at the end of the month were equivalent to a 68 days supply,
compared to a 69 days supply at the end of December.
between large and small car stocks increased,

The imbalance

however, with large car

I - 11

stocks approximately triple those of small cars.
Foreign car sales in January were at a 1.7 million unit rate
for the third consecutive month, down 9 per cent from a year ago.

The

import share on a seasonally adjusted basis increased slightly to 18.3
per cent compared with 15.5 per cent in January 1973.

A number of foreign

car dealers reported that sales were hampered by low stocks, resulting
to some extent from ocean transport fuel shortages.
Factory sales of major home appliances, TVs, and radios in
January (estimated) were down sharply from both December and January a
year earlier.

Sales of these items appeared to have reached a peak

last spring and then to have leveled off for the rest of the year.

UNIT SALES OF SELECTED CONSUMER DURABLES
(Seasonally adjusted)
1973
Jan.

Nov.

1973-1974
Jan.
Dec.

Per cent change from
Year ago
Month ago

Annual rates, millions of units
Auto sales
Domestic
Foreign

12.2
10.3
1.9

10.4
8.7
1.7

9.6
7.9
1.7

Indexes,
Home goods, factory
Unit sales
TVs 1/
Radios 1/
Major appliances
/
e/

148
149
130
149

152
166
108
144

9.4
7.7
1.7

-2
-3
0

-23
-25
- 9

-13
-15
-44
- 9

- 7
- 7
-46
- 3

1967=100

160r
163
126
159r

139e
139e
70e
144e

Includes domestic and foreign label imports.
Estimated on the basis of data through January 26, 1974.

I - 12

Consumer surveys.

The Conference Board survey conducted in

late November and early December indicated a drastic deterioration
from September-October in consumer attitudes toward economic conditions
and a further drop in buying plans for autos and furniture and
appliances.

Intentions to take vacations were also off sharply and

purchase plans for homes remained at a relatively low level.
The index of confidence, a composite of attitudinal questions
about present business and employment conditions as well as expected
income and the economic outlook, is now lower than it was during the
1970 recession.

Consumer appraisals of business conditions at the time

of the survey were more unfavorable than in the preceding survey, and
the outlook for the months ahead deteriorated even more.

Buying plans

indicated by the November-December survey did not decline as much as
more general appraisals of the economy, and the composite index of
buying plans for durable goods and houses--while quite low--was still
somewhat higher than during the 1970 recession.
The previous Conference Board survey--like the OctoberNovember Michigan Survey Research Center survey--had found some upturn
in consumers' earlier gloomy appraisals of expected income and present
and expected business and employment conditions.

However, both these

surveys were taken before the public was fully aware of the energy
shortages.

The more favorable attitudes at that time probably

reflected the propensity of American households to adjust to unfavorable
developments such as continued inflation.

I - 13

The more moderate decline in the Conference Board index of buying
plans than in the index of confidence may reflect some continuation of
consumer intentions to buy before prices rise further; this tendency
was evident last year in both the Michigan and Conference Board surveys.
Inventories.

The book value of manufacturing and trade

inventories rose at a $32.0 billion annual rate in December (p)--down
from the high $38.5 billion November rate.

Manufacturers' inventories

increased at an annual rate of $26 billion in December--mainly in
durable goods industries, but also in petroleum and other nondurable
goods industries where there were rapid price increases.

Growth in

stocks of materials and supplies, and of finished goods, was substantially faster in December than in November.

Wholesale trade inven-

tories rose at a $6 billion annual rate in December.

Retail trade

inventories showed no change in December, following a $13.4 billion
increase in November.

December retail auto stocks rose at a $1.5

billion rate--off sharply from the $6.5 billion November rate.

For the fourth quarter as a whole, the book value of manufacturing and trade inventories increased at a $32 billion annual rate-substantially more rapid than the $20 billion third quarter rate.
About one quarter of the increased rate of accumulation
quarter was in auto stocks.

in the fourth

Much of the rest of the fourth quarter

gain may have been due to rapid price increases.
Manufacturing inventories rose at an $18 billion annual
rate--up sharply from the quarterly increases earlier in the year.
Almost one-third of the fourth quarter run-up was in machinery--particularly nonelectrical.

However, there were substantial increases in

I - 14

stocks of food and beverages and petroleum and coal--industries with
rapid price increases in recent months.
Wholesale trade inventories rose at a $6 billion annual rate
in the fourth quarter--up from the $4.5 billion third quarter rate but
the same as in the first quarter of 1973.

Retail trade stocks rose at

an $8 billion annual rate--up from the third quarter $3.6 billion rate
but the same as in the second quarter.

Retail auto inventories in the

fourth quarter were up at a $4.5 billion rate--three times as fast as
in

the third quarter.
BUSINESS INVENTORIES
(Change at annual rates in seasonally adjusted
book values, $ billions)
1973
Q IV (p)

Oct.

Nov.

Dec. (p)

20.4

31.8

24.8

38.5

32.0

12.4
9.8
2.6

17.9
11.4
6.5

13.3
8.4
4.9

14.5
8.3
6.2

25.9
17.5
8.4

8.1
13.9
11.7
11.5
Trade, total
Wholesale
6.1
3.6
4.5
6.1
7.8
5.6
7.9
3.6
Retail
1.5
4.5
.4
2.4
Auto
Note: Details may not add to totals due to rounding.

11.4
1.4
10.1
5.4

24.0
10.6
13.4
6.5

6.2
6.2
- .1
1.5

Q I
Manufacturing and trade
Manufacturing,
Durable
Nondurable

total

Q II

21.5

22.9

9.8
6.6
3.2

11.4
7.7
3.7

Q III

The overall manufacturing and trade inventory-sales ratio rose
from 1.41 in November to 1.44 in December,
year earlier.

a level slightly below a

The manufacturing inventory-shipments ratio rose sharply,

from 1.54 in November to 1.60 in December; the increase was largely in
durable goods industries--especially nonelectrical machinery, instruments and transportation equipment (mainly in aircraft and parts).

The

I - 15

December wholesale trade inventory-sales ratio was unchanged at 1.10 (p).
The ratio of inventories to unfilled orders at durable goods producers'
moved up to .715

(p)

in December from .708

in November--the first

increase in over two years---but it was far below a year earlier.

INVENTORY RATIOS
1972

1973
Dec. (p)

Nov.
Inventories to sales:
Manufacturing and trade
Manufacturing,
Durable
Nondurable

total

Trade, total
Wholesale
Retail
Inventories to unfilled orders:
Durable manufacturing

Dec.

Nov.

1.46

1.45

1.41

1.44

1.60
1.89
1.24

1.61
1.92
1.23

1.54
1.85
1.16

1.60
1.96
1.18

1.32
1.19
1.41

1.30
1.18
1.39

1.28
1.10
1.42

1.29
1.10
1.45

.867

.856

.708

.715

I - 16
Manufacturers' orders and shipments .
goods declined 6.6 per cent in December .

New orders for durable

Much of the drop was

centered in motor vehicles and parts and in defense.
cluding transportation equipment,

However, ex-

durable goods orders declined 3.1 per

cent, instead of rising slightly, as initially estimated.
For the fourth quarter as a whole, new orders for durable
goods rose 1.6 per cent--a bit more rapidly than in the third quarter
but substantially below the gains in the first half of 1973; nondefense
capital goods were up a strong 4.3 per cent,
Shipments of durable goods declined 3.8 per cent in
December--almost entirely in motor vehicles and parts.

The rise in

unfilled orders for durable goods slowed somewhat in December.
For the quarter as a whole, shipments of durable goods
increased 2.7 per cent--about the same as in the third quarter.

Backlogs

rose 5.7 per cent--compared with an increase of 7.2 per cent in the third
quarter.

MANUFACTURERS' NEW ORDERS FOR DURABLE GOODS
(Per cent changes)

1973
Nov. from
Oct.

Dec. fom
Nov , (P>

QIII from
QII 1/

QIV froml
QIII (p)1

.7
1.8

1.6
1.1

.6
,O

Excluding motor vehicles and parts

- .4

3,3

1.4

-4.8

Excluding transportation equipment

3.1

-1.5

-2,8

-2.0

-3.0

6.7
.5

-7.2
5,1

-3,3
4,3

-16.9
-7.8

Durable goods, total
Excluding defense

Primary metals
Motor vehicles and parts
Household durables

Nondefense capital goods
Defense capital goods
Construction and other durables

2.3

4.3

3,2

-22.7

16.9

13.8

1,7

2.2

- ,9

i/ Changes between quarters are based on quarterly average levels,

-6.6
-5.1

-3.1
-37,2
-1,3

I - 17

Cyclical indicators.

The Census composite cyclical indicators

were generally weak in December, as may be noted in the table.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from prior month)

1973
July
12
5
5
6

Leading, trend adjusted
Coincident
Coincident, deflated
Lagging

.8
1.2
1.5
2.8

Aug.
1.0
.4
- .9
2.2

Sept.
-1.4
.7
.9
1.7

Oct.

Nov.

.9
1.8
1.4
1.6

1.4
.9
.1
1.2

Dec. (p)
.1
- .1
- .2
1.8

-Leading indexes prior to trend adjustment-Census undeflated
Boston FRB deflated

.4
1.2

.6
- .9

-1.7
- .7

.6
.6

1.0
.3

- .3
-1.8

Of the eight leading series available for December, those
increasing were industrial materials prices and the ratio of price to
unit labor cost.

Series declining were new orders for durable goods,

initial claims for unemployment insurance (inverted), contracts and
orders for plant and equipment, common stock prices and housing
permits. The average workweek in manufacturing was unchanged. (Since
release of the leading indicators, the change in instalment credit
outstanding has become available and it was down sharply.)
Of the leading indicators available for January, the average
workweek declined sharply but common stock prices improved slightly.

I -

Construction and real estate.

Seasonally adjusted value of

new construction put in place, at $131 billion, dropped 2 per cent
further in January.

Outlays for private residential construction

continued to fall and were 18 per cent below the February 1973 high.
Expenditures for private nonresidential and public construction,
while close to their December rates, remained below earlier peaks.
In constant dollars total value of new construction was 12 per cent
below the January 1973 peak.

In current dollars the decline was 3

per cent.

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

Private
Residential
Nonresidential
Public
State and local

Federal
Total - 1967 dollars
1/

Per cent change in
January from
Dec. 1973 Jan. 1973

QIV(r)

/
Jan.- L/

136.5

136.9

135.6

131.3

-2

- 3

103.3

105.0

102.0

97.6

-2

- 4

60.5
42.8

59.4
45.5

54.5
47.5

50.3
47.3

-4

33.2

31.9

33.6

28.0
5.2

27.2
4.7

28.8
4.8

28.7
4.9

- 4

94.0

88.9

86.8

83.4

-12

QI
Total - current dollars

1974

1973
QIII(r)

Data for January 1974 are confidential Census Bureau extrapolations.
case should public reference be made to them.

-15
+11

In no

I - 19

Reflecting uncertainties stemming from the energy crisis and
other factors, seasonally adjusted sales of new single-family homes by
merchant builders in December dropped to their lowest level since
March 1970.

At the current sales rate--down 18 per cent from November--

builders' stocks of units available for sale reached a record 13
months' supply.

At the same time, the median price of new units

actually sold advanced 4 per cent further, remaining above the rising
price of unsold new homes.

In the market for existing homes, sales in

December were below a year earlier for the fifth consecutive month.
The median price of such units continued about a tenth higher.
SALES, STOCKS AND PRICES OF NEW SINGLE FAMILY HOMES
Homes

Homes

sold 1/ for sale 2/
(Thousands of units)

Months'
supply

Median price of:
Homes for sale
Homes sold
(Thousands of dollars)

1972

QIV

761

402

6.3

29.2

28.3

1973
QI

733

426

7.0

30.3

29.4

QII

681

433

7.6

32.6

31.2

QIII(r)
QIV(p)

562
481

454
450

9.7
11.2

33.5
33.9

32.1
32.9

October(r)

515

452

10.5

33.2

32.3

November(r)

510

447

10.5

34.0

32.6

December(p)

417

450

12.9

35.3

32.9

1/ SAAR.
2/

SA, end of period.

I - 20

With rental demands stimulated in part by reduced interest
in single-family homes, the vacancy rate for residential rental

properties remained relatively low in the fourth quarter of 1973,
despite the still high pace of completions of new units.

Although

above a year earlier, the average vacancy rate (5.8 per cent) was the
same as in the second and third quarters of 1973.

The homeowner-unit

rate, in contrast, moved up further to 1.2 per cent--the highest since

the fourth quarter of 1968.
RESIDENTIAL VACANCY RATES
(Per cent)

1965

Rental units

Average for the fourth quarter
1970
1971
1972
1973

8.5

5.2

5.6

5.8

Northeast
North Central
South
West

5.6
7.2
9.3
12.5

2.6
5.6
6.8
5.7

3.5
6.0
7.4
5.3

3.9
5.5
7.0
6.1

4.4
6.2
6.9
5.8

Homeowner units

1.5

1.1

1.0

1.2

Northeast

1.1

North Central
South
West

1.2
1.8
1.7

1.0
1.3
1.2

.9
1.2
1.2

1.1
1.2
1.3

1.0
1.4
1.6

Labor market.

The labor market has begun to show substantial

effects from fuel and power shortages and weakening demands in
sectors.

some

Payroll employment fell sharply in January, hours of work

declined and the unemployment rate rose .4 percentage points.

The

number of workers receiving unemployment insurance benefits also has
continued rising, to levels 20 per cent above a year earlier.

Energy

shortages have had major direct and indirect effects on employment in
automobile manufacturing and sales, gasoline stations, air transportation, and hotels and motels.

Preliminary estimates based on filings

for unemployment insurance suggest a cumulative total of

300,000

energy related layoffs since the beginning of December.
The January increase in the unemployment rate to 5.2 per
cent was from a revised December rate of 4.8 per cent.

As a result

of the annual revision of seasonal adjustment factors, the revised
data now show that in 1973 the unemployment rate declined during the
spring and early summer, held steady until early fall, and then began
rising near year end.

The January rise in unemployment occurred

largely among young adults and teenagers, and was accompanied by a
large increase in the labor force.

Since October the number of un-

employed workers has increased by over 600,000 with increases occurring
among nearly all labor force groups.
Nonfarm payroll employment, which grew rapidly for over two
years, edged off in December (after a downward revision) and dropped
by 260,000 in January.

Employment reductions in January were widespread

with sharp losses in contract construction and durable goods manufacturing-particularly autos, primary metals and machinery.

In addition, average

I - 22

SELECTED UNEMPLOYMENT RATES
(Per cent, seasonally adjusted)

1973
I
Total
Males 20 years and over
Females 20 years and over
Teenagers

III

1974
Jan.

5.0
3.4
5.0
14.8

4.9
3.3
4.8
14.7

4.7
3.0
4.8
14.3

4.7
3.0
4.7
14.3

5.2
3.4
5.2
15.6

Household heads
State insured

3.0
2.9

2.9
2.7

2.7
2.7

2.8
2.7

3.0
2.9

White collar
Blue-collar

3.0
5.6

3.0
5.4

2.9
5.2

2.8
5.3

3.2
6.0

weekly hours of manufacturing production workers fell sharply--from
40.7 hours in December to 39.9 hours in January--with declines in

nearly all industries.

There were also further job cuts in retail

trade and services, apparently in part energy-related.
CHANGES IN NONFARM PAYROLL EMPLOYMENT
(In

thousands,

seasonally adjusted)

Dec. 1971-

Dec. 1972-

Nov.

1973-

Dec.

1973-

Dec. 1972
Nov. 1973
Dec. 1973
Jan. 1974
---------- Average Monthly Change--------------Total nonfarm

Private
Manufacturing
Durable goods
Service-producing
Trade
Service
Government
Federal
State and local

228

243

- 48

-259

189

213

-114

-281

75
61
115
51
42
39
- 1
41

63
54
124
52
53
31
- 1
32

- 4
- 7
-130
-120
2
66
16
50

-125
-113
- 27
- 37
- 17
22
- 6
28

I - 23

Earnings.

The average hourly earnings index for private

nonfarm production workers rose moderately in January.
have slowed somewhat in the past several months.

Increases

But since early

1973, the index has risen at a 7 per cent annual rate faster than
during Phase II although slightly slower than during the year and a
half prior to the August 1971 wage freeze.

Wages in manufacturing

recently have been rising at about the same pace as during the prefreeze period, but there have been noticeable slowdowns in construction
and services.

HOURLY EARNINGS INDEX*
(Seasonally adjusted; per cent change at annual rates)
Jan. 1970Aug. 1971
Total private nonfarm
Manufacturing
Construction
Transportation and p. u.
Trade

Mar. 1973Jan. 1974

7.3
6.9
8.9
8.7
6.3

5.6
5.4
5.5
9.2
5.0

7.0
7.0
6.6
7.4
7.1

7.8

Services
*

Jan. 1972Mar. 1973

4.7

6.9

Excludes effects of fluctuations in overtime premiums in manufac-

turing and shifts of workers between industries.
Productivity and costs.

Productivity performance has been

sagging since the second quarter of 1973, as often occurs when output
growth slows.

Output per manhour in the private nonfarm sector

declined at a 2.4 per cent annual rate in the fourth quarter; over the
year nonfarm productivity rose only .8 per cent, compared with a 4.6
per cent gain during the four quarters of 1973.

I -

Compensation per manhour in the private nonfarm economy
increased at an 8.3 per cent annual rate in the fourth quarter; from
the fourth quarter of 1972 to the fourth quarter of 1973 hourly
compensation increased 8 per cent, reflecting generally strong
demands for labor, rising prices, a heavy collective bargaining
calendar, and an increase in employer social security taxes at the
beginning of the year.
Unit labor costs rose at a rate of 11 per cent in the
fourth quarter of 1973--the fourth consecutive quarter of substantial
unit labor cost increases.

In the nonfarm sector these costs were

up 7.1 per cent over the year, compared with 2.4 per cent during the
four quarters of 1972.

I - 25

In the first major

Collective bargaining.

collective bargaining

settlement of 1974 the three major aluminum companies and the United
Steel Workers--representing 55,000 workers--agreed to a new forty month
contract effective February 1.

This contract provides a total wage

rate increase of about 15 per cent over its life, an improved cost-ofliving adjustment (COLA) provision for wages, and substantial improvements
in pension benefits--including a possible pattern-setting cost-of-living
escalator.

The COLA for wages provides for a 1 cent an hour increase in

wage rates for each 0.3 point rise in the CPI with no maximum; this will
give the workers approximately a 1 per cent increase in wages for each
1 per cent increase in the CPI.

Under their old agreement (1 cent an

hour for each .4 point rise in the CPI) the workers had received 35 cents
or about 9 per cent over their three year contract.
The pension agreement is the most significant feature of the
new contract.

A pension COLA provision, effective February 1, 1976,

will provide all members who retire after February 1, 1974 with 65 per
cent of the average annual percentage increase in the CPI in the
previous year.

The agreement is designed to provide a retired worker

initially with an income (including social security) of about 85 per
cent of his gross on-the-job pay.

In addition, the pension package

lowers the retirement age to 62 years from 65, increases the basic
monthly pension payments to retirees, and provides full pension benefits
plus $230 a month until retirement age for workers who are involuntarily
retired as a result of layoff or plant shutdowns.
available for the cost of these improvements.

Estimates are not

I - 26

The aluminum agreement has traditionally set a pattern for
can, steel and other metal industries that bargain with the steel
workers union and it is likely that forthcoming demands in the steel
industry will follow closely the provisions of the aluminum agreement.
Major collective bargaining agreements in 1973 as a whole
provided smaller pay increases than settlements reached in 1972:

first

year adjustments declined from the 7.3 per cent average in 1972 to
5.8 per cent in 1973 and a similar decline occurred in wage rate gains
over the life of the contract.

However, these data may overstate the

extent of moderation in wage bargaining for two reasons.

First, data

on wage rate changes under collective bargaining agreements do not
include cost-of-living increases and about 40 per cent of the workers
included in the data were covered by agreements containing escalator
clauses.

Cost-of-living adjustments were higher in 1973 due to rapid

price increases.

Second, a modest rail wage settlement (less than

4 per cent over the life of the contract) held the average wage increase
down in nonmanufacturing activities.
In the manufacturing sector, overall negotiated pay gains
also slowed from the previous year.

But among factory woerkers not

covered by costs of living escalators, negotiated wage increases rose
from 6.1 per cent in 1972 to 6.6 per cent in 1973.

This apparently

reflected an attempt by these workers to keep pace with workers
receiving COLA.

I - 27

About 5 million workers were covered by settlements
concluded in 1973--about double the previous year.

Contract duration,

which decreased in 1972, declined again in 1973 reflecting shorter
agreements mainly in the railroad and construction industries--probably
an attempt to reduce the period of "locked in"

wage increases during a

period of rising prices.

WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS*
(Mean per cent wage adjustment--annual rate)
1 9 7 3 (p)
p)

1971

1972

8.1
7.3
8.9
10.8

6.4
5.6
6.9
6.0

5.2
4.9
5.4
5.2

11.6
10.9

7.3
6.6

1973(p)
QI 193 p)

QII

QIII

QIV

4.5
6.1
3.8
4.9

5.7
5.2
5.8
5.8

5.3
5.1
5.5
4.6

4.3
3.9
5.7
4.9

5.8
5.9

5.3
6.5

6.1
6.0

5.9
5.9

5.4
5.3

Average-over-life-of
contract
Total
Manufacturing
Nonmanufacturing
Construction
First year
Total
Manufacturing

Nonmanufacturing

12.2

7.8

5.6

4.7

6.1

5.8

5.7

Construction

12.6

6.9

5.2

4.5

6.3

4.6

4.8

*Applies to settlements affecting 1,000 or more.

I - 2

Consumer prices. Consumer prices in December rose at an
annual rate of nearly 7 per cent, seasonally adjusted--much less than in
November--as the advance in food prices slowed sharply to a 3 per cent
rate.

Prices of other commodities and of services, however, continued

to increase at the high November rates of about 9 and 7 per cent,
respectively.

The rise for "All items" from December 1972 approached

9 per cent, the largest 12-month advance since 1951; however, excluding
food and petroleum products the increase was under 5 per cent.
CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
Relative
importance
Dec. 1972
All items
Food
Commodities less
food
Services
Addendum:
All items less
food and energy
componentsAll items less
mortgage costs
Services less home
financel 3/ 4/
Commodities less
food, used car,
home purchase-

Dec. '71
to
Dec. '72

Dec. '72
to
Dec. '73

100.0

3.4

8.8

22.5

4.7

20.1

40.1
37.4

2.5
3.6

5.0
6.2

71
71.5

3.0

96.3

Dec.'7?
to
June'73

June'73 Sept'73
to
to
Sept'73 Dec.'73

Nov.'73
to
Dec.'73

10.3

9.0

6.7

28.8

9.2

3.2

4.7
4.0

2.6
7.4

7.9
9.4

8.9
6.9

4.7

3.8

5.6

5.5

3.6

3.4

8.5

8.1

9.4

8.3

7.3

30.9

3.3

5.1

4.3

4.8

7.2

31.8

2.1

5.8

5.3

2.3

8.0
21.5

10.5

11.1

Confidential--not for publication.
Excludes food, gasoline and motor oil, fuel oil and coal, and gas and
electricity.
Not seasonally adjusted.
Home financing costs excluded from serv,ices reflect property taxes and insurance rates-- as well as mortgage costs--which in turn move with mortgage
interest rates and house prices.

I - 29

The slower December rate of rise in food prices--reflecting
mainly declines for meat and poultry--will likely be reversed in the
first quarter of this year.

According to preliminary confidential

Department of Agriculture estimates, much of the sharp rise in steer
prices this year had been passed on quickly to the retail level by the
end of January.

Thus, the large spread between farm and retail prices

which has prevailed for beef, especially in the second half of 1973,
appears to be continuing.
Gasoline, motor oil and fuel oil prices climbed further
in December, adding about 3 percentage points to the annual rate of
rise in the total index in that month and about 2 percentage points
in the last three months of the year.

Over the 12 months of 1973,

however, the impact of fuel price increases was overshadowed by the
rise in food prices.
FUEL PRICES AND THE CPI,1/ 1973
(Percentage changes, seasonally adjusted annual rates)
Relative
importance

All items less gasoline, motor
oil, fuel oil
1/ Confidential--not for publication.

Sept.1973
to

Nov.1973
to

Dec.1972

Gasoline and motor oil,
fuel oil and coal

Dec. 1972
to
Dec.1973

Dec.1973

3,6

23.4

75.0

86.2

96.5

8.2

6.9

3.5

I - 30

Agriculture.

Prices received by farmers increased 9 per

cent during the month ending January 15, to a level 39 per cent above
a year earlier.

Prices of potatoes, cotton, oilseeds, and most live-

stock and grains contributed to the rise but by early February corn
and soybeans were the only major commodities still moving up.
January red meat production was unchanged from the December
level, the high for 1973.

But the composition of livestock marketings

shifted as a 5 per cent drop in beef production was offset by an
increase in pork.

Beef supplies are expected to continue at low

levels since feedlot placements have been down for several months,
dropping another 7 per cent (seasonally adjusted) in December. But
underlying conditions suggest expansion of beef supplies over the
longer term.

The 1973 calf crop was 3 per cent larger than the 1972

crop, and 7 per cent larger than the 1971 crop.
Growers intend to plant 5 per cent more feed grains in 1974,
and 17 per cent more cotton, but soybean acreage may be down 3 per
cent from 1973.

Spring wheat plantings are expected to be 25 per

cent larger which would push total wheat plantings (winter and spring)
to 20 per cent above 1973 acreage.

January stocks of wheat were a

third below a year ago and feed grain stocks were off 7 per cent.
Soybean stocks were up 27 per cent but the prospective drop in 1974
plantings has helped keep prices strong.
Prices of less expensive food commodities were consistently
stronger in 1973 than those of higher-priced foodstuffs, and the

I - 31

outlook is still not good.

On January 15, the prices of beans, rice,

and potatoes were three, two, and one-half times higher, respectively
than a year earlier.

In comparison, cattle, hogs, and broilers,

(having reached highs in August and lows in December) were 20, 29,
and 35 per cent above a year ago, respectively. While an expansion
in meat production is expected in the second half, 1974 rice and
winter potato production (despite the rise in plantings of other
crops) are expected to be down 2 and 8 per cent, respectively.

DOMESTIC FINANCIAL
SITUATION

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

Indicator
Indicator

Monetary and credit aggregates
Total reserves
Reserves available (PNB)
Money supply
Ml
M2
M3
Time and savings deposits
(Less CDs)

CDs (dollar change in billions)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)

Latest data
Period
Level

Three
months ago

Year
ago

SAAR (per cent)
13.8
8.2
3.1
8.4

35.8
32.8

34.3
6.2

January
January
January
January

269.6
573.7
898.1
304.1

-3.6
6.3
6.6
15.2

4.7
8.6
8.3
12.2

5.0
8.3
8.2
11.5

January
January
January

65.5
324.4
638.0

2.7
7.1
15.8

1.7
7.7
7.5

20.8
7.8
12.5

Percentage of index points

wk. endg. 2/6/74
Federal funds
"
Treasury bill (90 day)
2/6/74
"
day)
Commercial paper (90-119
2/6/74
"
New corporate bonds Aaa
2/8/74
1 day
Municipal bonds (Bond Buyer)
2/7/74
FNMS auction yield (FHA/VA)
2/11/74
Dividends/price ratio (Ccmon
1/30/74
stocks)
Wk ending "
end of da«y 2/11/74
NYSE index (12/31/65=50)

9.13

-0.63

7.16
8.25
7.95
5.16
8.53

-0.41
-0.73
-0.11
-0.06
-0.18

3.65
48.57

0.01
-1.55

-0.58
-0.68
-0.53
0.20

2.92
1.48
2.12
--

-0.01

-0.34
0.55
-7.39

8.0
0.91

-16.91

Net change or gross offerings
Current month
Year to date
1973
1972
1973
1972

Credit demands

Municipal long-term bonds (gross
offerings)
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)
Federally sponsored Agcy. (net borrowing)

November
December
November
November
February

Business loans at commercial banks
U.S. Treasury (net cash borrowing)

January
February

e - Estimated

Month
ago

January
January

Market yields and stock prices

Total of above credits

Net change from

2.2
0.4
3.6
2.1
1974
-0.3e
2.2
-0.5
9.7

1.9
1.7
5.3
1.4
1973
0.8
3.6
3.9
18.6

21.4
20.1
54.3
12.1
1974
-0.8e
2.2
-1.2
108.1

21.9
15.9
50.9
17.3
1973
1.3
3.6
5.4
116.3

- 1

DOMESTIC FINANCIAL SITUATION

Financial and nonfinancial businesses raised an unusually
large volume of funds at banks and in the money and capital markets in
January and early February, while State and local governments maintained
their high rate of borrowing and the Treasury lengthened its debt in a
refunding.

At the same time, reflecting the indications of an easing

in monetary policy after the last Committee meeting, and the marked
slowing of foreign official sales of dollar assets since late January,
short-term interest rates declined from 75 to 100 basis points or more.
Longer-term rates also have edged downward recently, partly reflecting
weakness in the economic situation.
The very large volume of short- and long-term business borrowing
may be associated with the recent step up in inventory accumulation, and
the retardation of cash flows outside of the petroleum industry.

Banks

financed their sharp increase in loans during January in the time deposit
market, where CD inflows were large and other time deposit inflows accelerated.

Savings and loan associations' deposit growth remained close

to its recent rate and preliminary data suggest that they have further
increased new commitments for residential mortgages at somewhat lower
interest rates.

Savings banks' new money inflows were lower than in the

fourth quarter.

Apparently, these institutions--with their more interest-

sensitive depositors--were still being adversely affected by the level
of market yields as evidenced by the increase in non-competitive bids
on Treasury bills in January.
Outlook.

The weakening in economic activity and the expected

maintenance of the higher pace of capital market borrowing are likely

- 2

to be associated with some moderation in short-term financing by businesses
in the months ahead.

However, the combination of large corporation tax

payments in March and inventory accumulation--in part representing some
effort to hoard scarce raw materials and in part involuntary as sales
slow--is likely to contribute to relatively strong short-term credit
demands in the weeks immediately ahead.

Despite these near-term demands,

banks may reduce their prime rate further at current levels of market
rates; indeed, if the current level of market rates were to persist, a
prime rate of 8 3/4 per cent would be indicated for those banks using
formulas.
The Federal sector is not expected to be a major borrower in
coming months.

Although the Treasury will need to raise about $4 to $5

billion of cash by the mid-April tax date, it will thereafter pay down
about $9 billion of debt over the rest of the current fiscal year.
Projected Federal agency borrowing needs are also expected to be light

as savings and loan associations repay debt and demands on FNMA remain
small.

With net savings inflows at thrift institutions expected to

strengthen somewhat, new mortgage commitment activity is likely to
increase further.

This is likely to lead to some easing of mortgage terms

since demands for mortgage credit will continue to be restrained by
economic uncertainties as well as credit costs that are still high by
historical standards.
Inventories of U.S. Government security dealers are swollen
from the recent refunding operation, and those of corporate and municipal dealers have risen as a result of some investor resistance to the
recent edging down of new offering yields.

Prospective new issues of

II - 3

corporate and municipal bonds remain large, and thus long-term rates
could come under upward pressure unless market participants anticipate
further monetary ease.
The removal of capital controls by the United States adds
another uncertainty to the domestic financial outlook.

Both foreign

and domestic concerns are likely to take greater advantage than before
of borrowing facilities in U.S. markets.

Demand pressures may focus

most on long-term markets, where U.S. rates currently compare favorably
with rates abroad.

At the same time, a large volume of foreign,

especially oil, money is likely to flow into U.S. financial markets,
both through direct and indirect channels.
move into the more liquid short-term assets.

However, these flows may
Thus, international

flows could tilt the interest rate structure somewhat toward higher
long- and lower short-term rates.

II - 4

Monetary aggregates.

Despite a sharp increase in bank loans

and a pick-up in retail sales, M 1 declined in January.

Some of the

decrease reflected unwinding of the surge in foreign bank deposits
at large U. S. banks in late December, but even without this factor
M1 still would have declined.

There may also have been some shifting

out of demand deposits associated with the large rise in consumertype time and savings deposits at commercial banks in January.1/
Notwithstanding the contraction in M 1 , M2, and M3 grew moderately,
supported by the strong rise in time and savings deposits at banks
and a lesser, but still positive growth of deposits at thrift
institutions.
Although banks did not bid aggressively, net sales of CD's
in January were the highest since May 1973 and enabled banks not only
to replace earlier runoffs but also to meet loan demands and add
substantially to their investment portfolios.

U. S. Government deposits

and nondeposit sources of funds also grew in January, and with all
major sources of funds except demand deposits expanding, the adjusted
credit proxy registered its fastest monthly growth since last summer.
Bank credit.

Paralleling growth in the member bank adjusted

credit proxy, total loans and investments at all commercial banks

Appendix A of the Greenbook Supplement will contain the results of
the most recent Demand Deposit Ownership Survey.

- 5

MONETARY AGGREGATES 1/
(Seasonally adjusted changes)
----

QII

1973
QIII

I
I

1974
1974
Dec.

QIV I Nov.

-- Jan.

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

11.5

M 2 (M plus commercial bank
time and savings deposits
other than large CD's)

7.5

10.4

7.1

- 3.6

11.1

5.2

10.1

10.9

8.5

6.3

M 3 (M, plus time and savings
deposits at mutual savings
banks and S&L's)

10.4

4.5

9.2

9.7

8.5

6.6

Adjusted bank credit proxy

12.6

10.5

3.3

2.7

5.6

12.0

Time and savings deposits
at commercial banks
a.

Total

17.8

14.0

5.8

3.3

10.7

21.5

Other than large CD's

10.4

12.5

11.0

10.1

15.2

Billions of dollars_ /
Memoranda:
a.

U. S. Government
demand deposits

Negotiable CD's

Nondeposit sources
of funds

2.5

1.6

- 1.3

- 1.8

1.2

2.7

1/ Figures are based on the most recent revisions published January 31.
2/ Change in average levels month-to-month or average monthly change for
the quarter, measured from last month in quarter to last month in
quarter, not annualized.

- 6

(last-Wednesday-of-the-month series, seasonally adjusted) increased at
an annual rate of almost 16 per cent in January.

Bank holdings of

Treasury issues increased for the first time since June, and their
Only security loans among

holdings of other securities rose as well.

the major components showed no growth, although growth in
loans slowed.

consumer

Business loans and loans to nonbank financial institutions

were particularly strong in January.

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

1973
Nov.
QIV

QII
Total loans and investments 2/
U. S.

Treasury securities

Other securities
Total loans2/
Business loans -2
Real estate loans
Consumer loans
1/
2/

QIII

12.7

11.4

4.4

7.9

-34.4

-22.0

9.2

12.3

14.5
18.4
20.2
14.1

1974
Jan.

1.5

15.8

- 8.7 -28.6

15.8

12.6

- 2.8

11.4

16.9

17.8

5.5

8.9

2.4

17.3
17,0
14.7

5.1
14.2
10.1

9.9
13.6
10.5

5.3
13.5
4.5

Last-Wednesday-of-month series except
are adjusted to the last business day
Includes outstanding amounts of loans
banks to their own holding companies,
and foreign branches.
Revised.

5.0

Dec.r

-15.5
16.6
14.4
7.4

for June and December, which
of the month.
reported as sold outright by
affiliates, subsidiaries,

II - 7

The 16.6 per cent seasonally adjusted rate of growth of
business loans in January was the most rapid since late summer,
when the pace of economic expansion was still relatively rapid and
the cost of bank credit to business firms was considerably below that
of commercial paper.

Neither of these factors was [operative in]

January, but nonfinancial businesses borrowed heavily at banks and
also in the commercial paper and capital markets.

Reflecting the

attractive rates in the commercial paper market during the month
relative to the prime rate, the volume of dealer-placed commercial
paper issued was at a near record rate, and growth in the total
volume of short-term business credit--business borrowing at banks
plus dealer-placed commercial paper--exceeded the unusually rapid
pace of the first quarter of 1973.
While it is possible that January business loan expansion
was overstated by misestimated seasonal factors,1 / detailed analysis
of unadjusted data indicates that in several major industry categories
business loan expansion was much larger than usual--particularly
loans at large banks to commodity dealers and other wholesalers,
public utilities, firms in metals and mining, and foreign businesses.
Much of the short-term financing by businesses last month
may have been associated with further inventory accumulation.

Some

Business loans declined in January, but considerably less than the
average of previous Januarys.

II - 8

RATE SPREADS AND CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER
(Amounts in billions of dollars, seasonally adjusted monthly changes)

Prime rate
less 30-59
day commercial
paper rate
(per cent)

Business
loans
at all
commercial
banks 2/

Dealer
placed
commercial
paper

Total

Average Monthly Changes

Annual
rate of
change in
total 3/
(per cent)
1/

-----

4.1
2.2
2.2
.7

-1.3
.2
.1
1.2

2.8
2.4
2.3
1.9

23.7
19.0
17.1
13.8

April

-.29

2.4

-.1

2.3

18.2

May
June

-.05
-.41

2.8
1.4

-.7

2.8
2.1

21.8
16.1

July
August
Sept.

-.90
-.93
-.40

3.6
2.5
.4

-.1
-.5
.9

3.5
2.0
1.3

26.1
14.8
9.5

Oct.

+.52

2.7

19.5

Nov.
Dec.

+.38
-.04

1.3
.7

1.1
-.3

2.4
.4

17.1
2.8

1974-Jan.e/

+.42

2.2

1.5

3.7

25.9

Weekly Pattern:
5
1973-Dec.

+.10:

1973-QI
QII
QIII
QIV

12
19

26
1974-Jan.

-.10
- . 10
-.03

::::::

: ... .::: .......... ::: : :: : : :: : ::: :: : : :: : :: : : : : :: :: :: :: :
:
:::..
..
:: '
............................
:
° ° ° ° ° " °* ° °" " °"° "°° °°" °° "
"° ° "

-.03

+ .23

16
23

+.43
+.40

30
1/
2/
3/
e/

: ::

:::

-.03

: '.

+.45

*'
:-: :-

..
:

:: :

. . . . ...

Changes are based on last-Wednesday-of-month data.
Adjusted for outstanding amounts of loans sold to affiliates.
Measured from end-of-month to end-of-month.
Partially estimated.

- 9

of the accumulation in industries experiencing slower sales was no
doubt involuntary, but in other industries, where shortages and further
price rises are anticipated, the

accumulation may have represented

voluntary stockpiling of raw materials.
Finance companies also raised a considerable volume of
funds in commercial paper markets as the increase in outstanding
directly-placed paper reached the previous high reported in July 1969.
This together with increase in dealer-placed and bank-related commercial
paper expanded total commercial paper outstanding by the largest onemonth increase on record--$3.5 billion.

COMMERCIAL PAPER OUTSTANDING
(Seasonally adjusted, billions of dollars)1/
Change in amount
outstanding during:

Outstanding

Nov.

Dec.

Jan.

1973

1974e

Total commercial
paper outstanding

1.2

-.5

3.5

45.3

Bank-related
Nonbank-related

.1
1.1

-.1
-.4

.6
2.9

5.5
39.8

Dealer

1.1

-.2

1.5

13.9

Direct

-.2

1.4

25.9

Jan. 31,

Seasonally adjusted figures are unavailable for bank-related paper.
The unadjusted data for bank-related paper are combined with
seasonally adjusted nonbank-related data to obtain the total for
commercial paper outstanding.
e/ Estimated.
NOTE: Components may not add to totals due to rounding.

- 10

Finance companies appear to have used the proceeds of their
commercial paper financing to reduce bank loans, but nonbank
financial institutions other than finance companies borrowed heavily
at banks, producing a sharp increase in total loans to nonbank
financial institutions.

A special Federal Reserve Bank survey of

large commercial banks showed that much of the growth in this loan
category reflected loans to real estate investment trusts (REIT's).
Loan commitments to all nonbank financial institutions had grown
steadily in recent months,1 / and it appears that the REIT's, beleaguered by adverse publicity, are less able to borrow in commercial
paper markets and are turning to their bank lines for financing.
The survey suggests that the bankers are not concerned by these
takedowns, but are watching developments closely nonetheless.

See Supplemental Appendix B for the most recent Monthly Survey of
Loan Commitments.

II -11

Nonbank financial intermediaries.

The January deposit exper-

ience at savings and loan associations and mutual savings banks differed
substantially, with S&L's receiving an estimated $2.0 billion in net new
money, while MSB's received less than $100 million.

The seasonally

adjusted annual rate of growth for these institutions is estimated at
8.0 per cent for S&L's and 1.0 per cent for MSB's.

The increase in

non-competitive bids on Treasury bills during January supports the
view that the relatively high yields on market instruments represented
strong competition for the savings dollar--particularly in New York City
where MSB's lost over $100 million in deposits in January

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)

Mutual
savings banks
1973 - QI
QII
QIII
QIV p /
November
December p/
1974 - January e/

Saving and loan
associations

Both

8.1
6.8
- .4
5.8

16.0
10.4
3.1
8.9

13.6
9.2
2.0
8.0

6.8
8.5
1.0

8.8
8.8
8.0

8.3
8.7
5.5

p/ Preliminary.
e/ Estimated on the basis of sample data.

Recently available balance sheet data for the fourth quarter
of 1973 indicate that total sources of funds at insured S&L's were
nearly 40 per cent below the fourth quarter 1972 level.

After record

increases in borrowings during the third quarter, S&L's borrowed only
$0.9 billion in the final quarter of 1973--a less-than-seasonal amount.
And, although fourth quarter deposit inflows showed marked improvement

II - 12

from the third quarter pace--to a level 22 per cent less than a year
earlier--mortgage acquisitions dropped to about half the amount acquired
in the comparable period of 1972.

This reduction reflects primarily

the reduced level of outstanding commitments and a preference for
allocating funds to increase liquid assets and reduce other liabilities
rather than to acquire new mortgages in the market.

Current data suggest

that emphasis on rebuilding liquidity and reducing borrowings and other
liabilities may continue during the early months of this year.

II-13

FOURTH QUARTER SOURCES AND USES OF FUNDS AT INSURED
SAVINGS AND LOAN ASSOCIATIONS
(Billions of dollars, not seasonally adjusted)

1972

1973

Deposit accounts 1/

7.1

5.0

Borrowed funds

1.8

8.9

5.9

7.6
-..3
16.2

5.9
-1.9
9.9

Increase in liquid assets4 /
Gross mortgage acquisitions
Total

0.3
15.9
16.2

1.1
8.8
9.9

Memorandum: Detail of gross
mortgage activity
Loans closed
Loans purchased
Refinancings (included
in loans closed)

13.1
2.7

7.5
1.3

Sources

Subtotal

Gross mortgage repayments 2/
Other sources, net 3/
Total

Uses

1/
2/

1,4

Net change in deposits, including interest credited.
Includes, in addition to repayments, proceeds from sales of loans
Excludes interest,
and participations and miscellaneous credits.
taxes, etc.
Includes net changes in loans in process, reserves and surplus,
and other liabilities minus the net changes in miscellaneous
loans and assets not set out separately in the "uses" statement.
Reflects all eligible liquid assets, according to FHLB requirements. For 1967 and 1968, includes only cash and U.S. Government
securities. Since 1968, includes also Federal agency issues

maturing within five years.

Consumer credit.

- 14

The increase in total consumer credit out-

standing during December slowed to the lowest rate in nearly two years.
After adjustment for normal seasonal variation, the gain amounted to
$8.4 billion (annual rate).

For the full year 1973, however, consumer

credit expanded by a record $22.9 billion or 14.5 per cent.
Instalment credit outstanding rose at an annual rate of only
$4.9 billion in December, the smallest increase since January 1971.
Nonautomotive consumer goods credit, which amounts to less than onethird of total instalment credit outstanding, accounted for more than
60 per cent of the increase, with the remainder about equally divided
between home improvement credit and personal loans.

Automobile credit

outstanding declined slightly during December, the first absolute decrease in this category in three years.
The December slowing of instalment debt growth reflected a
slump in extensions in several key categories, with total extensions
dropping more than 11 per cent.

The seasonally adjusted decline in

auto credit extensions--13.2 per cent--was accounted for not only by
the reduced level of new and used car sales, but also by a further
decrease in average contract size reflecting price concessions on large
cars and a further shift in the mix of sales toward smaller cars.
Extensions for the acquisition of nonautomotive goods were down more than
12 per cent from November, mainly because bank credit-card extensions
during December were far below the normal seasonal pattern following an
upsurge in November.
The ratio of consumer instalment credit repayments to disposable personal income, which had stabilized at about 15.5 per cent

- 15

in each year from 1967 through 1971, increased to an average of 16.4 per
cent last year after rising to 15.9 per cent in 1972.

During the third

quarter of 1973, the ratio reached a record 16.7 per cent, but there
was a slight decline in the fourth quarter.
This rising burden of indebtedness may have been a contributing
factor in the uptrend in delinquency rates on consumer credit.

The

seasonally adjusted delinquency rate on consumer instalment loans at
commercial banks rose sharply in December to 1.99 per cent, only
marginally below the early 1949 peak.

Delinquencies were up from

November to December for nearly all types of loans.

For the full year

1973, the delinquency rate averaged 1.80 per cent, well above the 1.64
per cent rate of 1972 and the 1.54 per cent rate of 1971.

This uptrend

during the past two years has run counter to the downward movement nsu
usually associated with an expanding economy.

- 16

Short-term interest rates.

Rates in short-term credit markets

have declined substantially since the January FOMC meeting, mainly in
response to System actions which supplied reserves visibly in the market
at successively lower levels of the funds rate.

Treasury bill rates

generally have moved down 60 to 85 basis points, and many private rates
have fallen by a full percentage point or more.
On private short-term instruments, rates had been declining
slowly but fairly continuously since early December in response to
widespread market expectations of some near-term easing in monetary
policy.

These anticipations, already sufficient to cause private rates

to fall well below levels justified by the prevailing level of the funds
rate, strengthened around mid-January as published data began to indicate some weakness in monetary growth and a slowdown in real economic
activity.

Then, after the January FOMC meeting, as conditions in the

Federal funds market eased, the decline in private short-term rates
accelerated.
In the Treasury bill market, rates had risen counter to the
general down trend of private rates from late December through the
January FOMC meeting, in part because actual and anticipated sales of
bills by foreign central banks were weighing heavily on the market.
Beginning in late January, however, foreign central banks became net b
buyers of bills; moreover, market participants began to expect added
demand for bills from countries receiving enlarged oil revenues.

These

developments have accentuated the recent decline in bill rates, so that,
despite the concurrent decline in dealer carrying costs, the large
negative carry on dealer positions persists.

Treasury coupon markets.

- 17

Yields on Treasury coupon issues

also have declined since the January meeting, notwithstanding the
February refinancing.

The Treasury, encouraged by the strength of the

coupon market, chose to lengthen debt in the refinancing, and with an
ample cash position, it allowed a net paydown of $450 million.

Auction

averages on the three new issues were below their coupon rates, as shown
in the table.

However, dealers received rather large awards, aggregating

$1.6 billion for the three issues combined.

While they have made progress

in distributing their holdings, the overhang of dealer positions has
introduced some caution into the market.

FEBRUARY REFUNDING

Issues
Bond

Amount 1/
$0.3

Years to
maturity

Coupon

19-1/2

7-1/2%

Auction
average
7.46%

Dealer
awards 2/
$157

(reopened)
Note

2.25

Note

1.5

Total

6.95

771

6-7/8

6.70

706

4.05

1/
2/

3-1/4

1,604

In billions of dollars offered to public.
In millions of dollars,

Looking ahead, the Treasury probably will need to raise an
additional $4 to $5 billion of new money by mid-April in order to meet
seasonal needs, possibly through the sale of TABs and short-term notes
in early March and again in early April.

Such borrowing is made more

likely by the expiration of the Treasury's authority to borrow temporarily

from the "Fed."

- 18

These borrowing projections assume that foreign redemp-

tions of special issues will continue their recent slowdown.

Redemptions

have totaled nearly $700 million since the start of the year, but only
about $70 million of this total has occurred since the last Committee
meeting.
In the market for Federal agency debt, due to the improved
deposit experience of S&L's, the Federal Home Loan Banks may retire
more than $1 billion of debt during the rest of fiscal 1974, rather
than roll over maturing issues as previously planned.

Thus, it now

appears that net Agency borrowing and asset sales for the second half
of fiscal 1974 will be about $1.1 billion below the amounts projected
a month ago--and $5.2 billion below the amounts projected as recently
as November.

II - 19

SELECTED SHORT-TERM INTEREST RATES
(Per cent)

Daily rates

Early Dec.
highs

Jan. 22

Jan. 29

Feb. 5

Feb. 11

Treasury bills
3-months
6-months
1-year

7.68
8.08
7.47

7,96
7.76
7.05

7.62
7.39
6.89

6.93
6.84
6.54

7.12
6.94
6.48

Commercial paper
1-month
90-119 days
4-6 months

9.88
9,50
9.25

9.38
9.00
8.75

9.00
8.63
8.50

8.63
8.25
8.00

8.36
8.00
7.75

9.75
9.13

9.10
8.63

8.63
8.38

8.00
7.50

8.00
7.75

Federal agencies
1-year

7.83

7.79

7.87

7.42

7.18

Bank prime rate

9.75

9.50

9.25

Large negot. CD's
3-months
d 6-months

Statement week ended
Jan. 30
Feb. 6
Jan. 23
Federal funds
(weekly average)

9.60

1/ Highest quoted new issues.
2/ Average for first six days of the week.

9.47

9.13

Feb.13 2.
8.86

- 20

Private long-term securities markets.

Long-term bond yields

have declined slightly, on balance, since the last FOMC meeting.

large volume of new issues and concern about the prospective rate of
inflation caused bond yields to rise throughout much of January.

Late

in the month, however, bond markets rallied in response to a substantial decline in short-term rates and widening expectations that the
Federal Reserve was easing monetary policy.

The yield decline was

especially marked in the corporate new issue market, and underwriters
found their new issues to be over-priced and moving slowly.

In the

municipal market, dealers continued to hold substantial inventories
in anticipation of further price rises.
In the first quarter, total corporate security offerings are
projected to average about $300 million per month more than in the
fourth quarter of 1973.

The increase is due to the expanded level of

public bond offerings by industrial corporations and financial firms.
Among financial firms, issues by bank holding companies are expected
to be especially large--close to $1 billion in the first quarter.
Recently, a number of borrowers have altered the amount, timing, and
maturity structure of offerings in response to the congested calendar
and prospective interest rate movements.

So far this year, there have

been approximately $300 million of postponements and $110 million of
cancellations in the corporate bond market.

Given the sensitivity of

borrowers to the current market environment, the projections of longterm security offerings for February and March should be viewed as
especially tentative.

II -

SELECTED LONG-TERM INTEREST RATES

New Aaa
utility
bonds 1/

Recently offered
Aaa utility
bonds 1/

8.06 (5/29)

6.23 (6/24)
4.97 (10/21)

6.89 (7/20)

7.14 (12/31)

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

7.46 (4/21)
7.21 (12/1)

5.54 (4/13)

6.58 (9/27)

4.96 (12/7)

5.87 (1/14)

8.52 (8/10)

8.32 (8/10)
7.28 (1/5)

5.59 (8/3)
4.99 (10/11)

7.55 (8/10)
6.42 (1/3)

9.43 (6/19))
7.72 (12/11)

1971 - High
Low

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

8.19 (1/2)

1972 - High
Low
1973 - High

Jan.

Feb.

U.S. Government
bonds (10-year
constant maturity)

7.12 (5/28)
5.33 (12/10)

1970 - High
Low

Low

Long-term
State and
local bonds2/

7.29 (1/12)

9.20 (6/26)

8.16 (12/18)

6.29 (12/18)

5.87 (1/14)

4
11
18
25

8.13

5.18

6.94

8.17
8.27
8.24

8.25
8.21
8.25

5.22
5.24
5.26

6.98
6.99
7.01

1
8

8.11
7, 9 5 p

8.19
8.19p

5.20
5.16

7.01
6.95p

FRB series.
Bond Buyer.
Revised.
Preliminary.

Stock prices have declined, on balance, since the last FOMC
meeting, and the average level of stock issues is expected to show a
considerable drop in the first quarter, although February and March
will be higher than January because of an expected build-up in utility
issues.

Prices on utility shares tend to be more interest sensitive

than those of other companies and, with the recent drop in market yields,
have risen despite the decline in the rest of the stock market.

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

1973
Year
Corporate securities - total

1974
QIV e/

Q1
f/

Jan. e/ Feb. f/ Mar.f/

3,385

3,650

3,450

3,800

3,850

1,125
725
929

1,625
715
1,045

2,200
800
650

2,200
800
450

2,200
800
800

2,300
850
700

1,942

Public bonds
Privately placed bonds
Stock

2,779

2,200

2,100

State and local government

securities
e/
f/

Estimated.
Forecast.

The monthly volume of municipal financing in the first quarter
is projected to average about 10 per cent higher than in the first quarter of 1973.

Demand for these issues is being sustained by banks,

particularly in the intermediate maturity ranges, while the supply is
being kept up by special revenue issues and industrial pollution control
bonds.

II - 23

Mortgage market.

Mortgage market conditions apparently have

eased somewhat further since year-end, although the demand for funds by
builders and buyers continues to be restrained by economic uncertainties
and high costs of building and homeownership.

Seasonally adjusted new

mortgage commitments at savings and loan associations recovered somewhat further in January, according to tentative estimates.

The volume

of S&L mortgage commitments outstanding (including loans in process)-which edged up in December following nine consecutive months of decline-also apparently increased in January, after seasonal adjustment.
Contract interest rates on new commitments for 80 per cent
conventional home loans at selected S&L's drifted downward again over
the past several weeks, after levelling off around year-end.

February 8, the rate averaged 8.46 per cent--39 basis points below the
September peak but still above the usury ceilings of 8 per cent or less
currently prevailing in 10 states and the District of Columbia.1/
Average rates on conventional home mortgage loans closed, which had been
rising since early last year, apparently peaked around year-end and
changed little in January.

The increase in these rates was an important

factor in the 14 per cent rise over the past year in the average principalplus-interest payments of buyers of new and existing homes.
With 8-1/2 per cent FHA/VAmmortgages selling close to par in
the secondary market, the maximum contract rate on Government-underwritten
mortgages was reduced by administrative action to 8-1/4 per cent,
1/

On January 30, Pennsylvania abolished an 8 per cent ceiling on
conventional home mortgages under $35,000 and replaced it with a
flexible ceiling set 2-1/2 percentage points above the market yield
on long-term Government bonds and applicable to loans under $50,000.

II - 24

effective January 22.

On the same date, GNMA announced a revised

Tandem Plan to purchase up to 200,000 new-home FHA/VA mortgages bearing
a special contract interest rate 50 basis points below the new ceiling. 1/
In the first 14 business days following initiation of this interest-rate
subsidy program, 4,570 applications for commitments had been received
by GNMA--4,193 for single-family and 377 for multifamily mortgages.

Under this plan, no maximum income limits for eligible borrowers
have been established and maximum loan limits are about the same
as those currently prevailing for FHA-insured mortgages. GNMA commits
to buy the 7-3/4 per cent mortgages at a price of 96 (on certification
that no more than 4 points have been charged) and later sells the
contracts at auction to FNMA and/or other private investors at
market price--its loss on the entire transaction representing the
amount of the subsidy.

II - 25

CONVENTIONAL HOME MORTGAGES
At 120 S&L's

Average
going rate on
80% loans
(per cent)

Basis point
change from
month or week
earlier

Spread 1/
(basis
points)

Number of
Federal Home Loan Bank
districts with funds
in short supply

1972 - High
Low

7.46
7.23

45
-31

7
0

1973 - High
Low

8.85
7.43

---

107
-12

12
0

8.66
8.85
8.68
8.55
8.56

+48
+19
-17
-13
+ 1

72
104
71
70
n.a.

12
11
10
8
6

1973
Aug.
Sept.
Oct.
Nov.
Dec.
1974
Jan.

4
11
18
25

8.56
8.53
8.55
8.52

0
- 3
+ 2
- 3

n,a.
36
28
28

5
4
5
4

Feb.

1
8

8.48
8.46

- 4
- 2

37
51

4
3

Gross yield spread is average mortgage return before deducting servicing
costs minus average yield on new issues of Aaa utility bonds with 5-year
call protection.

II - 26

Agricultural finance.

Several unusual influences evidently

stimulated farm loan volume in the closing months of 1973.

minimize or defer income taxes and in anticipation of higher future
prices, farmers postponed the sale of 1973 crops, sought to purchase
equipment in time to obtain an investment tax credit against 1973
income, and made advance purchases of production inputs to be used in
1974.

Curtailment of some trade credit traditionally offered as

sales inducement may also have increased farm loan demand at institutional lenders.
Consequently, for the first time ever, outstanding loans at
Production Credit Associations (PCA's) rose during the second half of
the year--by a significant 5 per cent--bringing the total 1973 gain to
18 per cent, the largest increase since 1959.

Loan repayments rose as

excellent 1973 net farm income would suggest, but new lending activity
was even stronger.

Farm lending experience at banks was similar to

that at PCA's, as judged from banker responses to January 1 surveys in
the Chicago and Minneapolis Districts.

Repayments were up and requests

for renewals were low, but demand for new loans continued strong
through the last two quarters.

For the current quarter, somewhat

lower over-all demand is expected, particularly for real estate and
grain storage loans.

Continued strength generally is expected in

machinery and operating loan volume.

II - 27

The farm real estate market continued active in the second
half of 1973, pushing outstanding Federal Land Bank loans up 9 per cent.
Rural bankers in the Chicago District reported a further average increase
of 5 per cent in farm land prices during the fourth quarter.
Interest rates on farm loans edged up only slightly during the
fourth quarter of 1973, following sharp third quarter increases.
Land Bank billing rates now range from 7.5 to 8 per cent.

Federal

On January 1

rates at most Production Credit Associations ranged between 8.5 and
10 per cent, while most-common farm loan rates at rural banks in the
Seventh and Ninth Districts were concentrated between 8 and 9 per cent.
Federal finance.

The Federal budget released by the Adminis-

tration on February 4 projects a budget deficit of $4.7 billion this
year followed by a deficit of $9.4 billion in fiscal year 1975.

analysis of the new budget is contained in Appendix A.
As shown in the table at the end of this section, the Administration's estimate of budget outlays for fiscal 1975 is $304.4 billion,
a $30 billion increase over the current year estimate of $274.7 billion.
Our estimate of spending in the current year is $2.7 billion below
the official budget figure.

recent years, overestimation of outlays

in the on-going fiscal year has been a characteristic of the budget
document.

The rate of spending so far this year is consistent with a

final figure of $274.7 billion only if

one assumes a considerable speed-

up of outlays over the next four months.

- 28

Our estimate of fiscal 1974 Federal receipts, $267.1 billion,
is also below the Administration's.

The $2.9 billion difference exists

partly because we have not assumed that the windfall profits tax will be
enacted.

Since it now appears that Congress may legislate a rollback

of crude oil prices, enactment of a windfall profits tax seems unlikely.
We should note, however, that tax payments by corporations are nonetheless
expected to be high this Spring as firms make unusually large final
payments on their 1973 liabilities.

In the budget document, corporate

tax payments this Spring are estimated to be about $5 billion larger
than last year, a figure roughly equal to ours.
We are projecting personal tax refunds of $24.9 billion this
fiscal year--a full $2.0 billion above the most recent Administration
estimate.

This reflects our assumption that overwithholding continued

unabated throughout the past year.
$21.9 billion.

In fiscal 1973, personal refunds were

II - 29
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

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

Other net financial sources a/

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

Feb.

- .7

- .5

--.

0.1

3.0
-2.0

1.0

-1.1

2.0

- .2

-3.1

-4.0

4.5

0.1

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

23.4
23.6

Maturing coupon issues
held by public

Net borrowing by government-sponsored agencies

2.3

10.5b /

Budget agency borrowing

April

.1
-3.0

Level of cash balance,
end of period

Sales of financial assets

March

-4.7

5.8

19.8
22.9

5.1

6.1

11.2

19.1
23.1

28.3
23.8

0.7

0.2

4.5
0.2

0.2

0.3

-0.4

-0.3

0.7

a/ Checks issued less checks paid and other accrual items.
b/ Actual.

0.1

0.7

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

Fiscal 1974 e/ FY 1975 e/ Calendar Years
Budget F.R.
Budget
1973
1974
1973
Doc.
Actual F.R.B.-' IV*
Doc. Board

Staff Estimates
F.R.B.
Calendar Quarters
1974
IV
II
III
I

Federal Budget
-4.7
270.0
274.7

-4.9
267.1
272.0

-9.4
295.0
304.4

-7.9
250.4
258.3

-12.1

-5.0

-7.3

278.7
290.8

59.9

62.3
69.6

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

3.5
n.a.
n.a.

1.3
3.9

12.5
n.a.

-. 2

n.a.

7.9
.7
-.7

7.3
2.9
1.9

6.7
-2.1
0.4

Cash operating balance, end of period

ti.a.

8.7

n.a.

7.5

10.4

3.7
1.7

3.0
1.1
10.1

Surplus/deficit
Receipts
Outlays

Memo- :

Sales of financial assets 3/
Budget agency borrowing 4/
Sponsored agency borrowing 5/

13.6

4.5
1.8
1.3

10.4

3.60.1
16.3

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

High Employment surplus/deficit
(NIA basis) 7/
Actual

-3.86/

-4.7
280.5
285.2

Surplus/deficit
Receipts
Expenditures

*
Acua

4.1
1.2
-1.0

8.7

7.5

1.1

0.3

0.3
3.2

0.1
0.9

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

-8.9
65.6
74.5

7-9
1.0

7.5
n.e.
n.e.
n.e.

Seasonally adjusted, annual rates

National Income Sector

-5.8
-2.6
--

6.1

e
1.0e

-4.3
70.3
74.6

1.1
4.3
1.9

64.9

8.4
80.5
72.1

e-prjete

e--projected

276.5

n.a.

-2.8

-8.6
304.8
282.0Z' 313.4

0.7
265.4
264.8

-11.6
288.9
300.5

3.1
275.5
272.4

-.9
281.7
282.6

n.a.

-2.0

-0.8

-1.7

1.7

n .- o

simtdt~.no

n.e.--not estimated

-17.9 -13.6
285.9 290.7
303.8 304.3

-14.0
297.1

0.5

3.9

-9.1

vial

n.a.--not available

311.1

Footnotes continued
1/

Includes such items as deposit fund accounts and clearing accounts.

The sum of sponsored and budget agency debt issues and financial asset sales does not necessarily
reflect the volume of debt absorbed by the public, since both the sponsored and budget agencies
acquire a portion of these issues.

Includes net sales of loans held by the Commodity Credit Corporation, Farmers Home Adm., Government National Mortgage Assn., Federal Housing Adm., and Veterans Adm. Receipts from these sales
are netted against Federal Budget Outlays shown above.

Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee
Valley Authority, which is included in the Net Treasury Borrowing from the Public shown above.

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.

Quarterly average exceeds fiscal year total by $1.7 billion for fiscal 1974 due to spreading of
wage base effect over calendar year.

Fiscal year exceeds quarterly average of $.9 billion due to seasonal adjustment.

Estimated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

2/13/74
CONFIDENTIAL (FR)
III -- T - 1
U.S. Balance of Payments
(In missions of dollars; seasonally adjusted)

YEAR

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

824

DEC.*

2,148

794 -1,216
710
1,300
70,310 32,104 18,158 20,048
-69,516 -33,320 -17,448 -18,748
2,040
1,438
-786

Remittances and pensions
Govt. grants & capital, net

798
6,841
-6,043

-422

-1,258

-872

-8.209

-690

-2,971
-75
-446
-3,762
-769
-186

-228
-204
-343
403
-5
-313

2,731

3,299

4.435
2,860
(277

807
1,426
658
158
-771
-1,185
(7

720
869
193
96
951
845
(93

1,201

371

374

43
453

5,081

9,927

-2,095

-2,751

-576

209

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
1"
"
"
other
Nonbank-reported claims -- liquid
"
"
"
other

237

-13

-15

-5

-13

-15

____

-792
-1,169
-4,783

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. Treas.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches 3/
Other private foreign
Intl. & regional organizations
Other nonliquid liabilities

2,795

Liab. to foreign official reserve agencies
U.S. monetary reserves (increase, -)
Gold stock
Special drawing rights
IMF gold tranche
Convertible currencies

-513
-380
-1,424

-48
-160
-1,084

500

-2

4.255
3,200
(177:

606
149
(-781)

156

674

464

-50
470

381

-7

-33

-5

233

-3,466

-1,355

-10,164
-9,223
-8,178
-8,197
-9,393
-9,725 -9,352
-1,553
-1,646

2,108
933
1,505
625
1,157
128
2,539
712

Errors and omissions
BALANCES (deficit Official settlements, S.A.
I
it
N.S.A.
Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 4/
"
, N.S.A.
Basic balance, S.A.
"
"
, N.S.A.

-5,290
n.a.
n.a.

*
1/
2/
3/
4/

1 97 3
3Q

Monthly, only exports and imports are seasonally adjusted.
Equals "net exports" in the GNP, except for latest revisions.
Balance of payments basis which differs a little from Census basis.
Not seasonally adjusted.
Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to
commercial banks and other foreigners.

2,766
3,000
n.a.
n.a.
-1,489
-501

-5

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

The strong appreciation of the dollar

that had begun last October was sustained through most of January but
was reversed toward the end of the month. Upward pressure resulted
from the market's view that the United States would not be as much

affected as others by the late December rise in oil prices, and by
such events as the floating of the French franc on January 21, and
the announcement of the large U.S. trade surplus in December.

The

dollar has tended to depreciate somewhat in the past three weeks,
reflecting the removal of U.S. capital controls and the relaxation
of restraints in some countries against capital inflows, and also in
response to a decline in U.S. interest rates relative to those abroad.
As of mid-February the dollar had depreciated about 13 per cent since
May 1970 (trade-weighted basis) and almost 3 per cent from the late
January highs.
Sales of dollars by some foreign central banks to slow the
declines of their currencies totaled about $3 billion in January, but
such sales diminished toward the end of the month and there were some
increases in officially held dollars in early February.

One of the

flows of funds tending to strengthen the dollar in the first three
weeks of January was a large increase in gross liabilities of U.S.
banks to foreign commercial banks.

These flows, which are highly

irregular, probably reflected the reversal of the year-end seasonal
decline; over the past 2½ months these liabilities have changed
little on balance.

-2-

The outlook for the balance on goods and services in the
year ahead is that there will be a marked shift from the sizable
surplus registered at the end of 1973 to a deficit position in the
latter half of 1974.

A large part of the shift will reflect much

higher payments for oil, and a contributing factor will probably be
some reduction from the current very high level of agricultural
exports.

It is now generally accepted that oil importing countries

as a group will have a current account deficit, and that an important
concern of international economic management will be to avoid attempts
by individual countries to achieve trade balances, apart from oil,
that would be unwarranted in terms of longer-run payments aims.
For the United States, the prospective trade deficit, if
allowance is made for oil imports, may not be inconsistent with
longer-run aims.

Some other countries, notably the United Kingdom

and Italy, may be in an especially poor position to absorb the
increased cost of oil, while such countries as Germany may be able
to do so relatively easily.
The over-all pressure felt by each country will depend in
part on the direction of the large capital flows that are in prospect.
An immediate response of some countries, notably France, has been to
prepare for large borrowings in international markets,and to reduce
barriers against inflows.

While strong flows are expected to come to

the United States because of the scope for investment offered by
capital markets here, the removal of controls on capital outflows, and
relative easing of U.S. interest rates, could generate very substantial
offsetting outflows.

III - 3

Foreign exchange markets.

After appreciating by about 12-1/2

per cent (weighted average basis) from end-October through late January,
the dollar has depreciated by some 2-1/2-3 per cent in the past three
weeks, following the removal of U.S. controls on capital outflows and
subsequent foreign relaxation of controls on capital inflows.

Central

bank intervention, which involved net sales of $4.2 billion in January,
has been relatively modest thus far in February.
The dollar actually peaked just after the French franc was
allowed to float on January 21.

After the initial firming in response

to this action, the dollar tended to stabilize and even ease somewhat.
On January 28, however, with the announcement of a record U.S. trade surplus
in December, the dollar once again rose sharply.

This renewed upward

movement was decisively ended on January 29 when the U.S. actions on capital
controls were announced.

On the next day Germany, Belgium, and the

Netherlands removed or relaxed restrictions on capital inflows, followed
by Switzerland on January 31.

(France and Japan had acted earlier.

See

details on some of these actions on p. III - 6 below).
Contributing to the dollar's decline since the widespread
relaxation of capital controls has been a substantial decline in U.S.

interest rates relative to rates abroad.

Another significant factor was

the announcement by the French government that it would float a $1-1/2
billion Euro-dollar loan. While this, of course, affected primarily the
franc/dollar exchange rate, it probably also caused other foreign
currencies to strengthen against the dollar, since it was indicative
of what other major countries might do.

It is worth noting that the French

franc, after an initial 5-1/2 per cent depreciation against the dollar
when the franc was first floated, has now appreciated back to very near
its pre-float level.

III

- 4

Other currencies worthy of special mention are the Canadian dollar
and the Italian lira.

The Canadian dollar has reacted strongly to the

decline in U.S. interest rates and the market's re-assessment of Canada's
The Canadian dollar in recent days has risen

favorable energy position.

to over $1.02, its highest level in well over a year, and the Bank of Canada
has purchased, net, $140 million thus far in February.

The lira has been

supported by Bank of Italy intervention on virtually every day this month.
(In January the Bank of Italy sold $900 million).

An increase in the

System's swap line with the Bank of Italy, from $2 billion to $3 billion,
was announced on February 4.
In the gold market prices have been extremely volatile in recent
weeks.

The London price was $130 before the floating of the French franc,

jumped to $141 shortly thereafter, receded to near $130 again, then rebounded to reach a new high of $147.75 on February 12.

This last spurt

seems to have been related, in part, to increasing speculation that European
countries may soon raise the official price of gold for intra-European
settlements.
Euro-dollar market.

Euro-dollar rates have declined in all

maturities during the past four weeks, in response to the decrease in
short-term rates in the United States, the removal of U.S. controls, and
perhaps some shifting out of other currencies into dollars.

The 3-month

Euro-dollar rate has dropped more than a percentage point, to an average
of 8.39 per cent in the week of February 13, reducing the spread over the

U.S. 60-89 day CD rate to 26 basis points

in the latest week.

The supply

of funds to the Euro-market was presumably increased during the period

III - 5

by the termination of controls on liquid funds held abroad by U.S. corporations.
Funds derived from higher payments for oil also added to supplies, but the
higher oil payments also led to higher demand for credit in the Euro-market.
For U.S. banks, the cost of borrowing overnight Euro-dollars
remained above the cost of Federal funds when subject to reserve requirements,
over most of the period.

U.S. banks' gross liabilities to their foreign

branches, which have changed little since November, declined slightly to
a daily average of $1.96 billion in the week of February 6.
The removal of U.S. capital controls on January 29 opens up the
possibility for yield differentials to result in substantial flows of funds
to the Euro-currency markets.

When these controls were terminated, U.S.

CD rates were below rates on Euro-dollar deposits of comparable maturity -by close to 1/2 percentage point in the case of 3-month funds.

Presumably

some arbitraging between the two markets has already occurred, tending to
reduce the differential.

The greater liquidity of the CD as compared with

the Euro-dollar deposit may help to prevent complete equalization of the
rates on the two instruments, but further flows of funds and a further
narrowing of the rate differential would appear likely.
On the borrowing side, U.S. companies that can borrow in the

U.S. commercial paper market can at present raise funds there more cheaply
than in the Euro-dollar market, where prime borrowers of short-term funds

today pay 3/8 to 5/8 over the bid rate on deposits of equivalent maturity,
i.e., 8.63 to 8.88 per cent for 3-month loans as of February 13.

With the

removal of FDIP, many direct investors may elect to pay off some of the
$1-1/2 billion of short-term Euro-dollar loans outstanding with funds

III - 6

raised in the commercial paper market.

However, the higher effective

costs of short- and medium-term bank credit in the United States than in
the Euro-dollar market will limit the impact of removal of the FDIP and
VFCR.
The Euro-currency markets are being subjected to many crossWhile downward pressure on Euro-dollar rates has come from the

currents.

U.S. side, changes in controls over capital movements by several industrial
countries in the last week of January have tended to increase demand in
Germany reduced the rate of the Bardepot from 50 to 20 per cent;

the market.

Belgium abolished several controls that prohibited or discouraged capital
inflows through the banking system; and France prohibited all lending
of francs to foreigners by banks and other financial institutions.

addition, Japan has moved since October to encourage capital inflows and
restrict outflows, reversing the earlier practice of suppling funds to the
market through Japanese banks.

Finally, as noted, the financial con-

sequences of the increases in oil prices are swelling the flow of funds
through these markets, with a net impact on rates that so far is not
determinable.
In January, the volume of new medium-term loans of Eurocurrencies (almost all Euro-dollars and with adjustable rates based on
deposit rates) remained at the very high levels reached last year.
Provisional estimates by the World Bank put the January total at $2.4 billion,
equal to the average monthly rate in the second half of 1973.

Extensions

of such loans have increased many fold in the past three years, primarily
representing new financing.

Italian and British borrowers continue to

III - 7

take a large volume of funds.

January borrowings included two 10-1/2

year loans, totalling $750 million, to IMI, an Italian state lending
institution, and two 10-year loans totalling $420 million to Burmah Oil
of the United Kingdom.

In 1973 Italian state agencies borrowed about $4.5

billion to finance Italy's external deficit, while U.K. public sector
borrowers took about $2.5 billion.
may be larger.

The February total for all borrowers

It will include a record $1.5 billion 7-year loan to the

French Treasury to protect French reserves against higher oil imports, and
a $500 million loan to the British Electricity Council.

Japanese firms

will soon be borrowing on a large scale in the Euro-dollar market or the
United States.

Italian state agencies' borrowings abroad may increase

further, with some funds possibly coming from the United States; British
borrowing will also continue heavy and may increase.

III - 8

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

(1)

month or

Over-

week ending

Wednesday

(2)
Federal

night

Funds

Euro-$

1973-Oct.
Nov.

10.04
9.51

Dec.
1974-Jan.

9.73
9.10

10.01

2 11.00
9 9.32
16
9.35
23
9.05
30
8.66
Feb. 6 8.81
13' 8.24

Differentials in
Preliminary

0.03 ( 0.90)

9.96

10,08
9.96
9.65

1974-Jan.

*/
p/

(3)
(4)
Differ3-month
ential
Euro-$
(1)-(2)(*) Deposit
-0.57 ( 0.26)
-0.23 ( 0.62)
-0.55 ( 0.24)

9.89
10.40
9.38

( 2.08)
( 0.38)
( 0.39)
( 0.24)
(-0.06)
( 0.45)
( 0.11)

10.32
9.37
9.57
9.48
9.09
8.79
8.39

9.88
9.75

9.77
9.60
9.47
9.13
8.85

1.12
-0.43
-0.42
-0.55
-0.81
-0.32
-0.61

(5)

(6)
Differential

60-89 day
CD rate

9.16
9.11
9.43
8.97

(4)-(5)(*)

0.80
0.78
0.97
0.41

(0.54)
(0.51)
(0.94)
(0.45)

9.25

1.08

(1.17)

9.00

0.37

(0.40)

9.13
9.13
8.63
8.13
8.13

0.44
0.35
0.46
0.66
0.26

(0.48)
(0:38)
(0.50)
(0.72)
(0.28)

parentheses are adjusted for the cost of required reserves.

U.S. balance of payments.

In January, the official settlements

balance is estimated to have been again in large surplus -- over $3 billion
(not seasonally adjusted and not at an annual rate) as many foreign central
banks sold dollars heavily in their efforts to slow the appreciation of
the dollar against their currencies.

In the fourth quarter of 1973 the

official settlements surplus averaged $1 billion per month (not seasonally
adjusted).

Inflows of short-term funds from commercial banks abroad

continued at a high level in January -- about $1-1/2 billion -- mainly

through U.S. agencies and branches of foreign banks.

III - 9

Complete but still preliminary data on fourth-quarter transactions in trade, securities and long-term bank-lending to foreigners
indicate that the net combined overall balance on these "basic" items
was a somewhat smaller surplus in that quarter than in the third quarter.
This suggests a probable weakening in the surplus on current and longterm capital account in the fourth quarter from the exceptionally large
surplus of $2-1/2 billion (seasonally adjusted, not at an annual rate)
recorded in the preceding quarter.
The U.S. trade surplus in the fourth quarter increased to nearly
$1-1/4 billion (not at an annual rate) from $3/4 billion in the third
quarter, with most of the gain accounted for by a very large surplus in
December.

Foreign net purchases of U.S. stocks, which totaled over

$400 million in November, turned to a small net sale in December.

For

the entire fourth quarter net foreign purchases of U.S. equities were

less than $500 million, down from about $900 million in the third quarter.
Foreign purchases of offshore Euro-bond issues by U.S. corporations
were quite large in December and for the entire fourth quarter but these
purchases were partially offset by net sales of U.S. agency bonds by the
World Bank.

In contrast, U.S. purchases of foreign bonds increased

sharply from the third to the fourth quarter -- by over $300 million -primarily reflecting heavy takings of Israeli bonds following the recent
war.

Overall, the net inflow on security transactions in the fourth

quarter was about $3/4 billion less than the $1 billion inflow in the
third quarter.

III - 10

Bank-reported claims (both long and short-term) on foreigners
rose very strongly in the fourth quarter -adjusted).

by $1-3/4 billion (seasonally

Long-term bank claims, which had decreased in the third

quarter by over $200 million, increased by $475 million in the fourth
quarter; short-term claims rose by over $1 billion.

The removal or

easing of restrictions on capital inflows by Japan possibly contributed
to this heavy U.S. outflow of bank credit lending to foreigners.

About

25 percent of the large outflow in December was through acceptance credits
to Japan as Japanese importers were encouraged to obtain financing for
imports from overseas sources.
The restraints on capital outflows from the United States which
have been in effect, in various forms, since 1963 were completely removed
at the end of January following considerable relaxation of these controls
on January 1.

The Interest Equalization Tax (IET) was reduced to zero,

and the controls on foreign investment (administered by the Department
of Commerce) and on bank lending to foreign residents (administered by
the Federal Reserve System) were terminated.

The early termination of

these controls was deemed appropriate in view of the recent improvement
in the U.S. trade and long-term capital position, the rise of the dollar
in the exchange markets, and the potential need of other countries to
finance the cost of higher oil prices.
U.S. foreign trade.

In December, the U.S. trade surplus soared

as imports fell from the extraordinarily high November level and exports

III - 11

remained strong.

For the fourth quarter, the trade surplus was at an

annual rate of $4.7 billion (balance of payments basis), and for
calendar 1973 the trade balance was in surplus by $0.7 billion.

In 1972,

the trade balance had been in deficit by nearly $7 billion.
Exports in the fourth quarter were $80.2 billion, at a seasonally
adjusted annual rate (balance of payments basis), up 10-1/2 percent from
the preceding quarter.

Exports of both agricultural and nonagricultural

commodities increased strongly.
Agricultural exports increased by nearly 9 percent in the fourth
quarter; all of this increase was in the form of higher prices, as the
volume of such exports showed little change.

In the case of wheat, the

volume of exports fell markedly (particularly in December), and the
value of wheat exports showed an increase only because of the 40 percent
increase in export prices from the third to fourth quarter.

Export prices

of nearly all other agricultural commodities, except soybeans, also
climbed in the fourth quarter.

The continuing increase in agricultural

prices, which were nearly 67 percent higher in the fourth quarter of
1973 than a year previous, has been the major factor in raising the
value of agricultural exports; the volume of such exports has shown
no increase since the first quarter of 1973.
In the fourth quarter, there were large increases in the value
of all major categories of nonagricultural exports.

More than half of

this value increase was due to higher prices, with capital goods,

III -

especially non-electric machinery, showing a particularly sharp rise in
unit values.
durables.

Volume gains were evident mainly in exports of consumer

It appears that the rate of growth in the volume of the two

major categories of nonagricultural exports, machinery and industrial
supplies, has slowed since the first quarter.

The slowing of growth in

exports of industrial supplies may continue as economic activity abroad
levels off, but the backlog of foreign orders for U.S. durable equipment
will probably sustain machinery exports -- at least through the first
part of this year.
Imports in the fourth quarter of 1973 were at an annual rate
of $75.5 billion, balance of payments basis, about 8 percent above their
third quarter level.

Large increases in the prices of imports accounted

for all of the rise in the value of total imports, as the volume of

imports declined slightly.
The value of fuel imports rose from an annual rate of $9.0 billion

in the third quarter to $11.6 billion in the fourth quarter, as import
unit values jumped more than 30 percent.

The effects of the Arab

embargo were clearly evident in December, when the volume declined
sharply from the October-November levels.

For the quarter as a whole,

the volume of fuel imports was 2-1/2 percent below the third quarter
level.

In January, (based on the weekly reports of the American

Petroleum Institute) the volume appears to have been somewhat lower than
in December.

III -

The fourth-quarter increase in the value of nonfuel imports was
concentrated in the categories of food and industrial supplies, as other
import categories showed minor gains or actually declined as in the case
of consumer durables and automotive equipment.
In volume terms, imports of capital goods as well as imports of
consumer durables and automotive equipment declined in the fourth quarter.
These decreases in volume may reflect the continuing effects of the
exchange-rate realignments, but they may also reflect supply constraints,
or delivery problems associated with bunker fuel shortages reported after
the sharp rise in oil prices in mid-October.

These bunker fuel shortages

were apparently temporary and were presumably alleviated, if not
eliminated, in January.
The continuing growth in the volume of nonagricultural exports

and the volume declines in most import categories have meant that the
external sector has provided a major stimulus to the U.S. economy
during the past year.

As shown by the table, the $2.0 billion change

in the volume of net exports of goods accounted for nearly half of the
increase in real GNP goods output in the fourth quarter.

The performance

of the external sector in 1973 represents a marked change from the
previous two years, when negative changes in net exports may have
acted to slow down the growth of the economy.

III - 14

CHANGES IN MERCHANDISE EXPORT AND IMPORT VOLUMES AND IN
REAL GNP GOODS OUTPUT
(changes from previous period in billions of 1967 dollars, S.A.A.R.)
GNP goods
output change

Exports
change

Imports
change

Net exports
change

1971
1972
1973

+11.7
+30.6
+35.1

-.5
+4.0
+9.7

3.1
5.4
2.1

-3.5
-1.4
+7.6

1973 - 1
2
3
4

+15.1
+1.9
+3.2
+4.3

+5.1
+2.3
+.7
+1.7

+2.3
-1.8
-0.6
-0.3

+2.8
+4.0
+1.3
+2.0

III - 15

Current external account positions of major foreign industrial
countries.

As discussed in the January Greenbook,

the outlook fot world

economic activity in 1974 will be greatly affected by the sharp increases
in the price of oil.

The oil-import bill for all OECD countries could

exceed 1973 levels by about $50 billion and for all non-oil exporting
countries by about $60 billion.

The associated increases in exports of

goods and services to the oil exporting countries from the OECD countries
might amount to about $7 billion; therefore, the current accounts of the
OECD countries as a whole might deteriorate by almost $45 billion vis-a-vis
the oil exporting countries.

Accordingly,

the combined current account

of the OECD area, which might, apart from the oil-price increases, have
been in surplus by approximately $4-1/2 billion (about equal to the
1965-1970 average of $4.6 billion) could be in deficit by about $40 billion
in 1974.
The $7 billion estimate of the increased imports by the oil
exporting countries may be on the low side, since the absorptive capacity
of these countries will be expanded by their ability to purchase the necessary technology and skills to go along with their investment expenditures.
However,

given the overall magnitude of the increases in OECD oil payments,

any estimating error attached to the oil exporting countries' purchases of
goods and services would probably not be significant.

A possible reduc-

tion in oil prices from their present levels might have a more important
effect on the overall deficit.

But even this effect would not be enough

III - 16

to reduce the prospective deficit by sufficient amounts to avoid the
kind of financing problems now facing the non-oil exporting nations.
The outlook for the non-oil exporting LDCs is extremely bleak.
For most LDCs, the higher oil-import costs -- in the absence of financial
aid -- would imply sharp reductions in other imports and in their investment programs.

Price increases not only for crude oil, but also for

petrochemical products, especially for fertilizer, are likely to have
far-reaching effects on the development programs of these countries,
particularly of the poorest among them.

In addition, demand for non-oil

primary products in 1974 will be affected by the slowdown in activity
projected for the industrial countries.

And, with price inflation con-

tinuing in the industrial countries, the purchasing power of the non-oil
exporting LDCs may be further reduced by an adverse shift in their terms
of trade, not only vis-à-vis the oil exporting countries, but also vis-à-vis

the industrial countries.
For the industrial countries, the oil situation is only one
factor, although the predominant one, in the changes in balance-ofpayments positions foreseen for this year.

While it is clear that the

sharp deterioration projected in the current accounts of the OECD countries
as a whole is associated mainly with the oil situation, the projected
changes for individual countries must be viewed against the background
of both the oil situation and other forces operating apart from the oil
crisis.

The outlook for current account positions depends upon several

III - 17
factors:

first, the current account positions of the different countries

as they appeared before the oil crisis -- at least some of which were
far from equilibrium; second, the impact of the policy measures -generally restrictive -- taken by individual countries to deal with both
cyclical conditions and the oil situation; and third, the direct impact
of the oil-price increases.
As can be seen from the table on page III-18, the current
account positions of individual major industrial countries before the
oil crisis began were quite varied.

Germany had a large current account

surplus in 1973 and, if not for the oil crisis, might have had another
substantial surplus in 1974; the current accounts of Japan and France
were close to balance in 1973 and might have been in small surplus in
1974; Canada (which is self-sufficient in oil) had a small current account
deficit in 1973 and would probably have had a similar position in 1974;
the United Kingdom and Italy had sizable deficits in 1973 and would have
had substantial deficits in 1974 even in the absence of the oil crisis.
It is generally recognized that the OECD countries in aggregate are bound to see their current account positions deteriorate
vis-à-vis the oil exporting countries, and a scramble by individual countries
to improve their own positions clearly cannot work in the

aggregate.

However, it also seems clear that those countries, specifically, the
United Kingdom and Italy, that were facing unacceptably large deficits
before the crisis need to improve their situation relative to other

CURRENT ACCOUNT BALANCES FOR MAJOR INDUSTRIAL COUNTRIES 1/
(billions of dollars, seasonally adjusted annual rates)

2/
1974 OECD forecasts 2/
1965-70
average

____

France 3

-0.3

_
1972
1973
Jan.-June July-Dec. Jan.-June July-Dec.

excl. oil
effects

incl. oil
effects

0.2

0.3

0.1(e)

-3-1/2

5.1

-1

Germany

0.8

-0.1

0.8

2.2

Italy-

1.9

3.7

1.4

-1.7

- 2 .0(e)

-2

-5-1/2

0.2

1.1

-0.5

-2.1

-5.3

-3-3/4

-8

1.2

4.3

8.9

0.2

-0.2

3/4

-0.4

-0.7

-0.6

-0.2

-0.7(e)

1.2

-9.4

-7.3

-1.9

3.9(e)

4.6

3.8

4.7

6.0

1.l(e)

4-1/2

United Kingdom4
Japan5

Canada
United StatesTotal OECD

-7-1/2
0
-2-1/2
-38-1/2

1/ Data for 1972 and 1973 were converted from local currencies using average quarterly exchange
rates (from FRB Bulletin), and for 1965-70 using average annual exchange rates; unless indicated
otherwise, current account figures are from national sources; all current account figures include
government transfers; (e) indicates estimate.
2/ 1974 forecasts are those of OECD; they are based on exchange rates of January 7-11 [see
CPE(74)1, Table 71; the forecasts excluding oil are the forecast balances adjusted by the OECD
to eliminate the following three effects of the oil-price increases: 1) the adverse net effect
on trade balances; 2) higher interest payments to oil exporting countries; and 3) smaller net
transportation balances as demand for the volume of imports reacts to higher prices.
3/ Data are from OECD; 1965-70 average for France is balance with non-franc area and thereafter, with world.
(footnotes continued of next page)

Footnotes continued:
4/ 1974 forecasts for the United Kingdom do not take account of the coal miners' strike.
5/ Not seasonally adjusted; Japanese authorities forecast a much smaller 1974 deficit.
6/ 1974 forecasts for United States are those of FRB staff; they assume a decline in the
volume of imports because of a continued embargo; second half 1973 is adjusted for military
grant to Israel of $2.8 billion, officially recorded as export sale without offsetting
grant entry.

III - 20

countries.

This would imply somewhat larger negative changes for

countries such as Germany, the United States, Canada, and also France
than might occur solely because of the oil-price increases.
The United Kingdom's trade position deteriorated sharply over
the past year.

In 1972, the trade balance was in deficit by about $1.7

billion; by the fourth quarter of 1973, however, the deficit had risen
nearly sixfold to an annual rate of $9.2 billion.

Consequently, the

current account, which was approximately in balance in 1972, showed a
deficit at an annual rate of about $7.2 billion in the fourth quarter
of 1973, despite a continuing increase in the United Kingdom's usual
surplus on services and transfers.

For 1973 as a whole, the trade and

current account deficits were $5.7 billion and $3.7 billion, respectively.
The deterioration in the trade account reflected primarily a
worsening of the terms of trade, by approximately 15 per cent from the
fourth quarter of 1972 to October-November of last year.

Prior to the

recent oil-price increases, it was generally expected that the
deteriorating trend in the United Kingdom's current account position
would be reversed in 1974, partly because increases in commodity
prices were expected to subside, and partly because the effects of
the large devaluation would become increasingly visible.
It now appears that this reversal of trend will be delayed.
The higher oil prices are expected to increase the United Kingdom's

III - 21
current account deficit by about $4-1/4 billion in 1974.

Some part

of the higher oil-import bill will be offset by increased exports to
the oil exporting countries, partly through the market place but also
by means of barter deals.

According to the agreement reached with

Iran, for example, the United Kingdom will essentially exchange $1/4
billion of industrial goods for an additional 5 million tons of
Iranian crude petroleum.

But the expectation of a reduction of some

commodity prices, in particular for food, may no longer hold.

Further-

more, the current labor troubles have reduced output substantially,
adversely affecting both exports and imports.

An inevitable outcome

of any settlement will be a somewhat higher rate of domestic inflation.
All these factors tend to reduce the chances of improvement in the
United Kingdom's competitive position aside from oil.
Germany had a substantial current account surplus last year
of $3.7 billion.

This large surplus compared with a $0.4 billion sur-

plus in 1972 and the expectation early last year of a fall to about
zero for 1973, as the effects of the large DM revaluations of the past
years were expected to take hold.

In contrast with these expectations,

the value of exports rose by almost one quarter during the year,
causing the trade surplus to rise to an enormous $12.7 billion.

The

increase in the trade surplus from 1972 to 1973 was more than twice
the increase in the deficit on services and transfers.

III - 22

A number of factors contributed to the large increase in

exports in 1973:

speculative buying early in the year in anticipation

of the DM revaluations in March and June; a relatively large margin of
spare capacity in the capital goods sector; the fact that a large proportion of German trade is conducted with countries whose exchange
rates did not change much in relation to the DM; and finally, a sizable

rise in German exports to Eastern Europe.
Before the oil crisis, the German authorities were expecting
only a small decrease in the large surplus on current account in 1974.
With real output expanding slowly this year, imports would not rise
much, while exports would continue to grow, reflecting the high rate

of order inflows of recent months.
rise in oil prices --

However, largely because of the

which the authorities estimate will increase

the 1974 import bill by about $5.3 billion --

the current account is

now expected to be roughly in balance this year.
The probable disappearance of the German current account
surplus this year is associated with little, if any, movement towards
underlying equilibrium in Germany's payments position.

Since Germany's

rate of domestic inflation in 1974 is likely to be lower than that in
most other industrial countries, the competitive position of German
industry may, in fact, improve.

Furthermore, the recent depreciation

of the DM, at least vis-à-vis the dollar, may further strengthen
Germany's position in world markets.

III - 23
France's current account surplus in 1973 is estimated to have
been about equal to the 1972 surplus of $0.3 billion.

The increase in

the trade surplus in 1973 was sufficient to offset the downward trend
in the service balance stemming from increasing remittances of foreign
workers and rising French tourist expenditures abroad.
Before the oil crisis, the trade surplus for 1974 was expected
to rise by about the same amount it had increased in 1973, primarily
because of the generally expected slowing in the price rise for primary
commodities.

As a whole, the current account position for 1974 was

expected to be slightly more in surplus than in 1973.
The oil-price increases are expected to worsen the French trade
balance by about $4-1/2 billion.

A deterioration of this size --

although not larger than that expected for most other industrial
countries --

was considered unacceptable by the French authorities.

Accordingly, their decision to opt out of the fixed currency relationship with their European "snake" partners was aimed partly at improving
the current account.

The fact of the matter is that the trade balance

improved considerably in the closing months of 1973.

The weakness of

the French franc preceding the downward float last month was associated
primarily with short-term capital outflows.
The decision of the French authorities to attempt to finance
part of the increased oil-import bill by depreciation-stimulated

III - 24

increases in exports appears to contradict the general understanding
among industrial countries that their current accounts in aggregate
must deteriorate as a consequence of the oil-price increases.

However,

the decision of the French Treasury to borrow $1.5 billion in the Eurocurrency market in order to finance investment expenditures abroad
seems to be more in line with this understanding.

Italy's current account moved from a surplus of about $2.6
billion in 1972 to a deficit of about $2 billion in 1973.

The main

factor in the change was an extremely sharp deterioration in the trade
balance.
As in the United Kingdom, the deterioration in the Italian
trade account stems mainly from the sharply adverse movement in the
terms of trade associated with the depreciation of the lira and the
steep rise in world prices of raw materials and foodstuffs.

But in

addition, Italian output in early 1973 was disrupted by strikes that
affected key export sectors and probably also induced a rise in imports.
Even without the higher price for oil, no significant improvement was foreseen in the Italian current account for 1974.

The

improvement that might have been expected from the large depreciation
of the lira vis-à-vis the currencies of Italy's major trading partners
may be eroded somewhat by the fact that the Italian inflation rate is
rather higher than the OECD average.

In addition, economic activity

in Italy's major market, Germany, is likely to be depressed.

III - 25
The net effect of the oil situation is estimated to increase
the Italian current account deficit by about $3-1/2 billion, implying a
total deficit of about $5-1/2 billion -- well above the expected deficit
of any OECD country other than the United Kingdom and Japan.
Japan's trade and current account positions changed substantially in 1973.

In 1972, Japan had a merchandise trade surplus of

$9.0 billion; with substantial net payments for services, the current
account surplus was $6.6 billion.

Last year, however, the trade surplus

decreased by about three-fifths to an estimated $3-3/4 billion.

Net

payments for services increased substantially from $2-1/4 billion in
1972 to $3-3/4 billion in 1973; as a result, the current account for
1973 was roughly in balance.
The huge decline in the trade surplus in 1973 resulted in part
from policy actions by the Japanese authorities aimed at stimulating
imports and restraining exports and in part from market factors.

Short

supplies of food and industrial materials led to a bidding up of world
prices, partly by the Japanese themselves.

Consequently, there were

substantial increases in import prices at the same time that rapidly
accelerating rates of activity pulled up import volumes by about 25
per cent.

As a result, import values rose by 70 per cent.

Export

values, on the other hand, were up 30 per cent with volumes rising only
about 5 per cent.

III - 26

Before the oil crisis, the volume growth of exports was
expected to increase somewhat in 1974, while that of imports was
expected to decelerate in line with the slowdown in domestic demand.
The merchandise trade balance was, therefore, expected to improve in
1974; with no additional substantial increase in non-merchandise payments predicted, the current account was expected to show a small
surplus of perhaps $3/4 billion.
The increase in oil prices is forecast by the OECD secretariat
to worsen the trade balance by about $8-1/4 billion and turn the current
account surplus into a deficit of perhaps $7-1/2 billion.

The Japanese

authorities are predicting a much smaller deficit of less than $1
billion.

This lower figure might be interpreted as the authorities'

policy aim.

In recent months, the government has responded to the

deterioration in the current account by drawing down reserves, allowing the yen to depreciate, and taking some measures to slow capital
outflows and stimulate inflows.

Also, fiscal and monetary policies

have been increasingly restrictive in order to slow the very rapid
rate of inflation.
Canada's merchandise trade balance improved from $1.6 billion
in 1972 to about $1.8 billion in 1973.

However, it appears that the

current account deficit for 1973 was approximately equal to the $0.6
billion deficit of 1972, as the deficit on services and transfers

III - 27

increased.

The small increase in the trade surplus in 1973 reflected

mainly steeply rising prices for primary commodity exports which were
almost offset by rising imports of capital equipment reflecting an
upsurge in investment expenditures.
The Canadian current balance, because of Canada's selfsufficiency in energy resources, is likely to be affected only
indirectly by the oil-price increases.

Therefore, the OECD's post-oil

prediction for Canada's current account position is essentially
unchanged from the pre-oil estimate.

However, since 70 per cent of

Canada's trade is with the United States, the response of the U.S.
economy to the oil crisis will be extremely important for the
Canadian balance of payments.

The increase in Canadian investment

expenditures expected in 1974 will mean substantial additional imports
of machinery and materials.

But, in the absence of a recession in the

United States, Canada alone among the major OECD countries -- perhaps
with the exception of Australia -- possibly might experience a small
improvement on its current account in 1974.

APPENDIX A:

THE NEW FEDERAL BUDGET*

The Administration's budget for fiscal year 1975 contains few
surprises and thus differs little from our previous budget projection.
The major initiative in expenditures--the boost in defense spending--was
fully reflected in our earlier projection. Receipts projections are
based upon income assumptions and tax rates roughly similar to our own,
and the emergency windfall profits tax on oil, the most important tax
legislation proposed, was announced prior to the budget.
The Administration expects a budget deficit of $4.7 billion
this year followed by a moderate increase to $9.4 billion in fiscal year

1975, as shown in the top panel of Table I. The NIA budget follows a
similar pattern. The bottom panel of Table I indicates that outlays are
expected to increase almost 11 per cent in fiscal 1975, nearly the same
pace as in the current year. The 9 per cent growth in budget receipts
in fiscal year 1975 is substantially less than the 16 per cent growth
expected during fiscal year 1974. For the most part these increases in
receipts and expenditures reflect the impact of inflation and previously
enacted programs rather than new initiatives.
The Administration has characterized the fiscal 1975 budget

as "continuing a posture of moderate restraint". Aside from defense,
no new spending programs or tax cuts are initiated that inject significant fiscal stimulus. The Administration's characterization also is
evidenced by the projected increase in the full employment surplus from
$4 billion this fiscal year to $8 billion (unified budget) in fiscal
year 1975. This surplus indicates that the projected shift toward
deficit in the actual budget is brought about by economic slowdown rather
than by discretionary action.

While moderate restraint may be a fair description of the budget, emphasis is not placed on spending ceilings or on the expenditure
reductions and program terminations so prominent in last year's budget.
Instead, the emphasis is on resisting a possible economic slowdown,
first by letting stand any increase in the deficit generated by a weaker
than expected economy and, second, by maintaining flexibility so that
timely fiscal stimulus can be undertaken if necessary. Alternative

contingency plans for fiscal stimulus are now being prepared, although
such plans are not discussed in detail in the budget.

* Prepared by William Beeman, Senior Economist in the Government Finance Section, Division of Research and Statistics.

A - 2

TABLE I
MAJOR FISCAL INDICATORS
(Fiscal years)

1972

1973

1974e

1975e

Billions of Dollars
Unified budget
208.6
231.9
-23.2

Receipts
Outlays
Deficit (-)

Full employment receipts 2/
Full employment outlays 2/
Surplus/deficit (-)

232.2
246.5
-14.3

270.0
274.7
-4.7

295.0
304.4
-9.4

224 1/
229
-5

243
245
-2

278
274
4

311
303
8

213.7
233.2
-19.5

243.3
255.1
-11.8

280.5
285.2
-4.7

304.8
313.4
-8.6

NIA budget
Receipts
Expenditures
Surplus/deficit (-)

Per cent
Per cent increase in
Receipts:
Budget receipts
2/
Full employment receipts 2/
NIA receipts

10.8
5.2
11.0

11.3
8.5
13.9

16.3
14.4
15.3

9.3
11.9
8.7

Spending:
Budget outlays
2/
Full employment outlays 2/
NIA expenditures

9.7
9.6
9.7

6.3
7.0
9.4

11.4
11.8
11.8

10.8
10.6
9.9

20.0
20.3

19.6
20.2

Per cent of full employment GNP
NIA receipts
NIA expenditures
e:
1/
2/

18.4
20.1

19.4
20.3

Administration estimate
Administration calculations of full employment receipts exclude impact
of overwithholding of personal income taxes beginning January 1972.
Unified budget basis.

A-

The Council estimate of the full employment budget on an NIA
basis, shown in Table II, shows stability in the full employment surplus
between calendar year 1973 and 1974. All estimates in the Table probably
overstate the extent of discretionary fiscal restraint in the current
period because, (1) the recent acceleration in prices tends to increase
full employment receipts much sooner than expenditures; and (2) the
calculation of full employment receipts is based upon estimates of
potential GNP which may be significantly overstated in this period of
energy shortage. 1/ On the other hand, the staff estimates, discussed
below, assume less spending in the first half of this calendar year
than the budget document. This may be evidence that the discretionary
restriction suggested by the official full employment budget (budget
basis) is not greatly exaggerated this fiscal year. The lower staff
expenditure estimate also explains why our projection of the full employment budget for calendar 1974 shows more of a change toward restriction
than does the Council estimate.
TABLE II
COMPARISON OF FULL EMPLOYMENT
BUDGET BALANCE ESTIMATES
(In billions of dollars)

1972
NIA budget
Council

Staff 2/
Staff, inflation
adjusted 3/

Calendar years
1973
1974e

-7.7

5.8

6.0

-1.1
-1.4

3.7
-2.0

6.6
-0.8

1/ Recently, quarterly estimates of the growth in potential GNP have been
revised downward from 4.3 to 4.0 per cent (annual rates) back to the
first quarter of 1970, but no adjustment has been made in the current
period for the reduction in potential GNP due to the energy shortage.
2/ The major difference in 1972 between the staff and Administration
calculation is that staff estimates of full employment receipts do
not exclude receipts derived from unintended overwithholding of
personal income taxes beginning January 1972. For 1974, especially
during the first half of the year, the difference is largely attributable to lower staff estimates of expenditures.
3/ This estimate phases in effect of inflation on receipts with a lag
of approximately one year.

A -4

In summary, the current budget plan, as evaluated by the fullemployment figures, can be described either as slightly restrictive-especially if the large targeted near-term spending increases are not
achieved--or as essentially unchanged and neutral--a position which is
taken in the Council's Economic Report.
Expenditure Projections
Our analysis gives us no reason to question the Administration's
estimates of outlays for fiscal year 1975. However, the outlays estimate
for the current fiscal year appears to be on the high side given the
rate of spending so far this year and the spending programs now in
train. Overestimation of outlays in the ongoing fiscal year has been a
characteristic of the budget document in recent years. Normally close
to 50 per cent of actual expenditures occur in the first half of the
fiscal year, but in the first half of this year outlays have totalled
only 47.5 per cent of the Administration's projected total. This low
ratio cannot be explained by special factors. The low ratios for other
recent fiscal years, shown in Table III, are explained by special factors
such as the deliberate speed-up in military spending in the second half
of fiscal 1972 (offset by greatly reduced spending in the first half of
fiscal 1973) and the institution of new spending programs, such as
revenue sharing, in fiscal 1973. The pace of outlays this year suggests
that spending will be $2-5 billion below the budget estimate given the
spending programs explicitly in the budget. Of couse, spending could
be significantly accelerated in the remaining months to achieve greater
stimulus or new programs could be introduced. However, since there is
no evidence of a speed-up, the staff's current estimate of spending
for this fiscal year is still $272 billion, $2.7 billion below the
Administration's figure.
TABLE III
OUTLAYS IN THE JULY-DECEMBER PERIOD
AS A PERCENT OF FISCAL YEAR SPENDING

1968
Total outlays
Military
e:

1969

1970

1971

1972

1973

1974e

48.4
48.1

50.5
49.0

50.3
50.6

49.3
50.1

48.1
46.0

48.1
46.8

47.5
43.8

Assuming totals shown in budget.

A - 5

An analysis of the NIA spending pattern on a half-yearly basis
also shows that the budget document implies a huge increase in the rate
of Federal expenditures during the first half of 1974, and much more
moderate growth thereafter. Based on an examination of the various components, staff estimates have been adjusted to take out a considerable
portion of this near term bulge (see Table IV). During fiscal 1975,
the staff estimates move to the budget path. Even after these adjustments, however, our estimates of spending growth during the first half
of 1974 are still quite large--almost 15 per cent per annum.
TABLE IV
GROWTH IN FEDERAL SPENDING--NIA BASIS
Per cent Change (Annual Rates)
Board
a
Administration

Half Years
Calendar 1973

Staff

I
II
le 1/

9.5
6.5

1975

19.4

14.8

lie

1974

9.4

13.0

5.8

7.5

I/ Excludes special transaction in Indian Rupees.
e: estimated. Allocation of Administration projection by half-years
is estimated by Board staff.
The budget for fiscal 1975 contains little in the way of new
expenditure programs. The major health and welfare reform measures
discussed in the State of the Union message do not significantly affect
spending in fiscal 1975. The requested appropriation for public service
jobs is $350 million--the minimum provided under the recently enacted
Comprehensive Employment and Training Act. It has been estimated that
this appropriation will support approximately 40,000 public service jobs.
The announced $10 billion energy research program also has a relatively
small effect in fiscal 1975. Outlays for energy research are scheduled
to increase by $200 million this year and by $600 million in fiscal
1975 to a level of $1.5 billion. It is possible that the full $600
million increment will not be achieved as the research programs for
more than 3/4ths of this increment have not been designated.

A -6

On a functional basis the largest increase in expenditures
is expected in "income security"--a category that includes retirement
and disability programs such as social security, unemployment insurance
and public assistance (Table V). The recently enacted social security
benefit hike--a two-stage increase in payments scheduled for April and
July--accounts for nearly half of the change in income security. About
$2.0 billion of the $7.3 billion increase in defense represents expected
pay raises while the remainder mainly reflects strengthening airlift
capabilities and increased research and development on strategic weapons.
TABLE V
SUMMARY OF BUDGET OUTLAYS BY FUNCTION
(Fiscal years, billions of dollars)

1973

1974e

1975e

Increase
1974-1975

National security and international affairs
National defense
International affairs

$79.0
76.0
3.0

84.5
80.6
3.9

91.8
87.7
4.1

7.3
7.1
.2

Human resources
Income security
Health
Education and manpower
Veterans benefits

113.7
73.1
18.4
10.2
12.0

132.4
85.0
23.3
10.8
13.3

151.5
100.1
26.3
11.5
13.6

19.1
15.1
3.0
.7
.3

24.0
6.2
.6
13.1
4.1

23.5
4.0
.6
13.5
5.4

24.9
2.7
3.1
13.4
5.7

1.4
-1.3
2.5
-.1
.3

6.6

6.1

6.2

23.2

28.2

30.1

1.8

246.5

274.7

304.4

29.7

Physical resources
Agriculture and rural development
Natural resources and environment
Commerce and transportation
Community development and housing
Revenue sharing
Other
Total budget outlays

A - 7

Receipts Projections
The few tax law proposals contained in the new budget would
increase receipts by only $1.3 billion in fiscal year 1975. The major
proposals are the emergency windfall profits tax, which adds $3.0
billion to receipts estimates, and the previously proposed tax reform
measures and liberalixed pension deductions which together reduce
receipts by less than $2 billion.
The Administration estimates of budget receipts, $270 billion
this year and $295 billion in fiscal year 1975, appear to be reasonable
given previously enacted tax increases and the current economic outlook.
These estimates are based on assumed levels of GNP and personal income
in calendar 1974 that are somewhat higher--$4.6 billion and $2.8 billion,
respectively--than the staff estimates. The assumed level of corporate
profits before tax is about $2.0 billion more than our latest estimate
and would be, perhaps, $6.0 billion more if we included the windfall
profits tax in our projections. In addition to the difference in income
assumptions, our estimate of personal tax receipts is lower because we
expect a higher level of refunds in the Spring of 1974 and because of
our lower estimate of tax rates. Table VI, below, shows the difference
between staff and Administration estimates of personal income taxes, NIA
basis.
TABLE VI
COMPARISON OF PERSONAL TAX RECEIPTS ESTIMATES
FOR CALENDAR 1974, NIA BASIS
(In billions of dollars)

Administration

Staff

Difference

132.3
21.9

127.5
23.9

4.8
-2.0

154.2

151.4

2.8

Personal tax and nontax receipts
Personal tax refunds, first half
of 1974 1/
Gross receipts (1 + 2)

The corresponding amount in the first half of 1973 was $21.2 billion.

1.
2.

A-8

As a result of these different assumptions, including the
exclusion of the windfall profits tax from our projections, the staff
estimate of budget receipts this fiscal year is about $3 billion less
than the Administration estimate. We have not yet prepared a budget
receipts projection for fiscal year 1975.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 20, 1974 : Greenbook

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