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CONFIDENTIAL (FR)

January 30, 1980

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section

DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

II

Employment and production........................................
Personal income and consumer spending.............................

1
5

Residential construction................................................

11

Business fixed investment........................................
Inventory investment.............................................
Government sector................................................
Productivity and labor costs......................................
Prices...........
..................
.......
.....................

15
15
17
21
22

Agricultural developments.........................................

24

TABLES:
Changes in employment........................................... .

2

Selected unemployment rates.....................................

2

Industrial production...........................................
Selected capacity utilization

4

rates for U.S. industry......................................
Personal income...................................................
................. ...........
Retail sales.........................
Auto sales.......................................... ............

4
6
7
7

New private housing activity......................................
Components of current dollar
business investment spending....................................
Survey of plant and equipment expenditures........................
Error history of the Commerce Department

9

annual survey .................................................

.

Business inventories.............................................
Dealer stocks of automobiles.....................................
Productivity and costs...........................................
Hourly earnings index............................................
Major collective bargaining settlements...........................
Recent changes in producer prices.................................
Recent changes in consumer prices.................................
Factors contributing to the CPI
acceleration, 1978 to 1979......................................

12
14
14

16
16
18
20
20
23
23
25

CHARTS:
New private housing starts........................................

10

Recent changes in prices of homes sold............................

10

New orders of nondefense capital goods............................
Cash prices for farm crops.......................................

13
27

TABLE OF CONTENTS (cont.)
Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

Monetary aggregates and bank credit...............................
Business sector finance......
....................................
Government debt markets.......................................
Mortgage markets.................................................
Consumer credit...................................................

3
7
9
13
15

TABLES:
Selected financial market quotations..............................
........... ............ .......
............... .
Monetary aggregates
Commercial bank credit and business credit........................
Gross offerings of corporate and foreign securities...............
Government security offerings...................................
Net change in mortgage debt outstanding...........................
Interest rates and supply of mortgage funds
at selected savings and loans..................................
Secondary home mortgage market activity...........................
Consumer installment credit.......................................

2
4
6
8
10
12
14
16
18

APPENDIX A
A revised method for calculating the high
employment budget

INTERNATIONAL DEVELOPMENTS

IV

Foreign exchange markets.........................
...............
OPEC surpluses and investment flows in 1979.......................
U.S. international transactions..................................
Foreign economic developments.....................................
Individual country notes.......................................

1
4
7
12
16

TABLES:
Estimates of OPEC current account and
external investments...........................................
U.S. international transactions..................................
Real GNP and industrial production
in major industrial countries..................................
Consumer and wholesale prices in major
industrial countries...........................................
Trade and current-account balances
of major industrial countries..................................

5
9
13
14
15

TABLE OF CONTENTS

(cont.)

Section

Page

CHARTS:
Weighted-average exchange value of the U.S. dollar.................
U.S. merchandise trade..................................

.......

II - T - 1

January 30, 1980

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest Data

Period

Release
Date

Data

Percent Change from
Three
Preceding
Periods
Year
Period
Earlier
earlier
(At annual rate)

Dec.
Dec.
Dec.
Dec.
Dec.
Dec.

1-11-80
1-11-80
1-11-80
1-11-80
1-11-80
1-11-80

104.0
5.9
3.1
90.4
21.0
69.5

4.0
5.8
3.0
4.2
6.2
3.6

Dec.
Dec.

1-11-80
1-11-80

35.7
6.39

35.7
6.33

35.7
6.26

35.8
5.92

Dec.
Dec.

1-11-80
1-30-80

40.3
181.8

40.1
10.7

40.2
11.5

40.6
8.3

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

1-16-80
1-16-80
1-16-80
1-16-80
1-16-80

152.2
149.1
173.8
96.2
155.8

Consumer prices all items (1967=100) Dec.

1-25-80
1-25-80
1-25-80

230.3
218.1
243.4

14.8
11.1
16.0

12.9
12.5
10.6

13.3
11.3
10.0

9.5
14.4
-1.4

12.7
16.1
9.4

12.5
16.3
11.1

13.5

12.7

10.7

Civilian labor force
Unemployment rate (%) 1/

Insured unemployment rate (%) 1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($) 1/
Manufacturing:
Average weekly hours (hr.) 1/
Unit labor cost (1967=100)

All items, excluding food & energy Dec.
Food
Dec.

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

Dec.
Dec.
Dec.

1-10-80
1-10-80
1-10-80

228.0
261.6
255.8

Personal income ($ bil.) 2/

Dec.

1-17-80

2022.5

(Not at annual rates)
Mfrs. new orders dur. goods ($ bil.) Dec.
Dec.
Capital goods industries
Nondefense
Dec.
Dec.
Defense

1-24-80
1-24-80
1-24-80
1-24-80

75.9
26.6
23.1
3.4

.6
4.4
7.9
-14.5

-2.2
2.0
6.0
-18.8

-1.3
14.4
20.8
-15.8

Inventories to sales ratio: 1/
Manufacturing and trade, total
Manufacturing
Trade

Nov.
Nov.
Nov.

1-24-80
1-24-80
1-24-80

1.42
1.57
1.28

1.41
1.54
1.29

1.42
1.54
1.31

1.40
1.49
1.31

Mfrs.' durable goods inventories to unfilled orders 1/ Nov.

1-24-80

.570

.566

.564

.573

Retail sales, total ($ bil.)
GAF 3/

Dec.
Dec.

1-11-80
1-11-80

77.0
16.6

Auto sales, total (mil. units.) 2/
Domestic models
Foreign models

Dec.
Dec.
Dec.

1-7-80
1-7-80
,1-7-80

10.6
7.8
2.8

Ratio:

Plant & Equipment expen. ($ bil.) 4/
All industries
1980
1980
Manufacturing
1980
Nonmanufacturing

1-10-80
1-10-80
1-10-80
1-17-80
1-30-80

1,527
136.8

12.2
14.0
7.5

.1
.3

8.6
7.5

-1.1
-8.3
27.2

-4.6
-14.7
43.9

195.67
89.51
106.16

Housing starts, private (thous.)
Leading indicators (1967=100)

1.1
-.
4

2/

Dec.
Dec.

Actual data used in lieu of percent changes for earlier periods.
At annual rate.
Excludes mail order houses.
Planned-Commerce November 1980 Survey.

10.9
14.3
8.2
.3
.0

-20.5
-2.2

-26.4
-4.3

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity apparently continued to expand at a moderate
rate through the end of the year.

Increases in employment and nominal

personal income were sizable in December, and the unemployment rate remained in the range that has prevailed over the last year and a half.
In addition, the growth in nominal retail sales strengthened and industrial production increased.

At the same time, there were further

indications of weakness in some key sectors:

housing starts continued

at a sharply reduced pace, consumer sentiment remained depressed, and
substantial auto-related layoffs persisted through January.

Finally,

the rate of increase in both consumer and producer prices excluding food
accelerated in December.
Employment and Production
Labor demand remained firm through the middle of December as nonfarm payroll employment rose 315,000 from a month earlier.

In contrast

to recent months, jobs increased in goods-producing as well as serviceproducing industries.

Manufacturing employment rose 110,000, after four

months of decline, but remained below its peak level of last July.
Sizable gains were posted in the machinery and equipment industries, and
the factory workweek rose 0.2 hour to 40.3 hours.

Hiring in the

service-producing sector remained strong with gains concentrated in the
services, government, and finance sectors.
Total employment, as measured by the household survey, also rose
about 300,000, but unemployment edged up slightly.

The jobless rate--

at 5.9 percent--remained within the 5.7 to 5.9 percent range (on the
basis of revised seasonal factors) that has prevailed since mid-1978.
II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1978
Q1

Q2

1979
Q3

Q4

Dec.

- - - Average monthly changes - - Nonfarm payroll employment2
Strike adjusted

334
318

302
304

196
205

59
62

208
220

317
303

69
57
12
39
169

64
56
8
48
150

-3
3
-6
16
113

-38
-8
-30
3
77

2
-26
27
29
133

108
63
45
47
97

Private nonfarm production workers
Manufacturing production workers

256
50

230
44

111
-19

11
-46

153
-4

229
106

Total employment3
Nonagricultural

275
268

264
282

10
35

284
244

136
138

304
330

Manufacturing
Durable
Nondurable
Construction
Trade, finance and services

1. Changes are from final month of preceding period to final month of
period indicated.
Not strike adjusted, except where noted.
2. Survey of establishments.
3. Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1973

Dec.

5.8

5.9

5.9

16.1
8.8
3.2
4.9

16.2
9.2
3.3
4.7

16.1
9.4
3.4
4.8

16.0
9.8
3.2
4.7

5.0
11.4

5.0
11.5

5.1
10.9

5.1
11.2

5.1
11.3

4.3

5.2

5.2

5.3

5.4

5.4

2.9
5.3

3.4
6.5

3.3
6.8

3.4
7.1

3.3
7.3

3.3
7.2

Q2

4.9

5.8

5.8

14.5
7.8
2.5
4.0

15.9
8.7
3.2
4.9

White
Black and other

4.3
8.9

Fulltime workers
White collar
Blue collar

Total, 16 years and older
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

1979
Q3

Q4

Q1

II-3
Unemployment rates for major demographic groups were little changed from
their November levels.
Since the December surveys were taken, there have been increases
in insured unemployment, suggesting an emerging weakness in labor demand.

In January, the level of insured unemployment, which has been trending
up since the middle of last year, was on average somewhat above its
December level.

In addition, the number of workers on indefinite layoff

in the automotive industry has increased to about 150,000, compared with
116,000 in mid-December; and there have been reports of layoffs in the
tire and steel industries in recent weeks.
The layoffs in January came on the heels of continued cutbacks in
production and capacity utilization in December in the motor vehicle and
parts, iron and steel, and rubber industries.
other manufacturing industries rose.

Utilization rates for most

On balance, manufacturers operated

at 84.4 percent of capacity in December, the same as in November, but
nearly 3 percent below the recent March peak.
Industrial production increased 0.3 percent in December following
small declines in October and November.

In December, production of

equipment, consumer nondurable goods, and nondurable materials advanced.
Output of business equipment rose 1.0 percent with gains throughout
most of that sector, and production of defense and space equipment
continued to advance.

However, output of autos, trucks and parts fell

once again in December, ending the year 26 percent below the level of a
year earlier.

Auto assemblies in December were at an annual rate of

6.8 million units, about 6 percent below the November pace, and January
assemblies are expected to drop further to around a 5.9 million unit

II-4

INDUSTRIAL PRODUCTION

(Percentage change at ann ual rate1; based on seasonally adjusted data)
1978

1979

H1

H2

H1

7.0

7.9

1.6

6.4
3.7
6.0
2.7
10.2

5.4
2.7
1.5
3.3
8.6

1.9
-.4
-6.7
2.3
6.1

8.4
9.7

11.1
16.1

9.9
2.9

6.3
5.2

Total
Final products
Consumer goods
Durable
Nondurable
Business equipment

Materials
Durable
Nondurable
Energy materials

H2

Nov.

Dec.

.3

-.3

.3

0.0
-2.4
-8.8
.5
2.4

-.1
-.5
-2.0
.3
.2

.5
.1
-1.1
.6
1.0

.4
-2.0

-.5
-1.2

.1
-.1

5.0
1.1

0.0
.3

.8
-.2

1.3
.5
3.7
-1.2

1. Rates of change for periods longer than one month are compound rates.

SELECTED CAPACITY UTILIZATION RATES FOR U.S. INDUSTRY
(Percent, seasonally adjusted)

1973-

Manufacturing
Primary processing
Advanced processing
Electrical machinery
Motor vehicles and parts
Aerospace and miscellaneous
transportation equipment
Materials
Durable goods materials
Basic iron and steel
Nondurable goods materials
Energy materials
1. Recent peak.
2. Percentage points.

1979

1974
High

Dec. 1979

March1

Nov.

Dec.

less
Mar. 19792

88.0

87.1

84.4

84.4

-2.7

93.8
85.5
88.7
98.7

88.6
86.2
90.5
92.3

86.5
83.3
91.2
70.1

86.5
83.3
91.7
67.4

-2.1
-2.9
1.2
-24.9

77.5

87.9

92.2

92.1

4.2

92.6

88.3

85.9

85.7

-2.6

91.5
104.8

87.5
89.4

83.6
81.8

83.2
81.7

-4.3
-7.7

94.5
94.6

90.0
87.6

89.7
86.5

90.1
86.2

.1
-1.4

II-5

rate.

Output of construction supplies also declined further in December,

to a level almost 2 percent below the level a year earlier.
Personal Income and Consumer Spending
Personal income and consumer outlays continued to advance in December,
although consumers reportedly remained pessimistic about prospects for
economicactivity generally and their personal financial conditions.

Per-

sonal income rose at a 13-1/2 percent annual rate, a bit faster than the
average pace earlier in the year.

Private wage and salary disbursements

also increased at a substantial rate for the second month in a row,
reflecting both higher wage rates and employment gains.

It appears that

real disposable personal income advanced further in December, following
moderate increases in October and November.

After declining earlier in

the year, real disposable income, at year end, stood about even with its
December 1978 level.
Growth in consumer goods purchases moderated somewhat during the
fourth quarter from the third quarter pace.

In December, nominal retail

sales increased about 1 percent after rising 3/4 percent in November;
for the fourth quarter as a whole, retail sales rose 2.1 percent, half
the third quarter gain.

The slowing in retail sales from the third

quarter has been concentrated in durable goods; nominal sales of furniture and appliances fell 2.7 percent in December and were down 7 percent from the August peak.

In addition, spending at automotive stores,

which has fluctuated from month to month, declined 2-1/2 percent during
the fourth quarter.

Sales of most major types of nondurable goods have

been relatively well maintained.

II-6

PERSONAL INCOME
(Based on seasonally adjusted annual rate data)

1978

1979

Q4

1979
Nov.

Dec.

- - Percentage change, at annual rates1 Total personal income
Wage and salary
disbursements
Private
Nominal disposable personal
income
Real disposable personal
income

$12.9

11.0

11.6

12.6

13.5

12.8
14.0

10.0
10.8

10.7
10.9

12.3
13.8

11.5
13.5

12.0

10.1

9.8

11.0

11.9

n.a.

3.6

n.a.

2
- - Changes in billions of dollars - -

Total personal income
Wage and salary disbursements
Private
Manufacturing
Other income
Transfer payments

$17.8

$16.3

$20.8

11.5

9.6
8.4
2.0

11.5
9.6
2.8

7.6
3.0

9.9
2.2

10.1
3.2
7.1
1.5

$20.8

12.9

$22.5

1.8

12.2
11.6
4.2

8.7
1.0

11.0
3.5

11.7

1. Changes over periods of one quarter or more are from final quarter
of preceding period to final quarter of period indicated. Changes for
quarterly period are compounded rates of changes.
2. Average monthly change.

II-7
RETAIL SALES
(Percentage change from previous period;
based on seasonally adjusted data)

1979
Dec.

Q3

Q4

Oct.

.5

4.2

2.1

-1.7

.7

-1.0

-2.1

2.2

-.3

-2.4

.0

.1

Total, less auto and
nonconsumption items

1.7

2.4

4.1

3.4

.0

1.2

1.0

GAF 2

-.4

2.4

5.3

1.5

-.3

1.0

-.4

1.6
3.6
1.7

-2.7
-7.1
2.3

5.1
3.9
8.1

-1.3
-2.4
-3.0

-5.6
-8.8
-1.2

-. 9
.0

1.6
1.7

-2.5

-2.7

2.1
-1.1
3.5
-1.0
4.4

2.3
.8
2.5
3.1
7.2

1.6
-.5

.9
5.6
2.2

Q1

Q2

Total sales
(Real)1

Durable
Auto
Furniture & appliances
Nondurable
Apparel
Food
General merchandise 3
Gasoline

3.9
.0
3.4
3.9
8.1

Nov.

1.1

1.0
2.9 -1.7
1.8 -. 7

1. BCD series 59.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales
are also excluded in the GAF composite sales summary.

AUTO SALES

(Millions of units; seasonally adjusted annual rates)
1979
Nov.

10.7

9.3

9.4

10.6

2.4

2.1

2.1

2.4

2.6

8.6

7.4

8.7

7.2

7.0

8.0

3.9

3.6

3.3

3.6

3.2

3.1

3.6

4.1

4.9

4.0

4.9

4.0

3.8

4.2

Sept.

10.8

9.8

2.5

2.2

9.3

8.2

Small

3.8

Intermediate
& standard

5.4

Q2

Q3

11.6

10.7

Foreign-made

2.3

U.S.-made

Total

Note:

Dec.

Oct.

Q4

Q1

Components may not add to totals due to rounding.

Total new car sales in December

were at a 10.6 million unit annual
For

rate, somewhat above the low rates recorded in October and November.
the fourth quarter, sales were at a 9.8 million unit rate--the slowest
pace since the end of 1975.

Most of the December gain was in sales of

U.S.-made autos, which increased from a 7 million unit annual rate to
an 8 million unit rate.

The surge in sales reflected in large part a

continuation of company-sponsored incentive programs and increased availability of the more popular fuel-efficient models at the end of the
year.

Price discounting continued into the new year, and sales of U.S.-

made models averaged a 7.9 million unit annual rate during the first
twenty days of January.

Sales of new foreign cars also increased in

December, rebounding to about the record reached last spring, due
primarily to greater supplies and to favorable pricing policies on some
Japanese imports.
The University of Michigan Survey Research Center (SRC) index of
consumer sentiment and the Conference Board index of confidence declined
in December, both remaining at levels which in the past were associated
with recessions.

The latest surveys were notable for their extremely

unfavorable opinions about the housing market.

In addition, results

from the SRC survey indicated for the second month in a row a higher
proportion of survey respondents citing reduced credit availability and
high interest rates as factors in their view that the present is not a
good time to purchase large household durable goods; the buy-in-advanceof-inflation rationale that seemed to have bolstered purchases during the
past two years now appears to be less important.

II-9
NEW PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)
1979
Oct.1

Nov. 1

Dec. 2

1.34
1.60

1.54
1.76

1.26
1.52

1.20
1.53

1.02
1.24

.82
1.07

.93
1.16

.75
.99

.77
1.07

.71
3.73

.75
3.88

n.a.
n.a.

.70
3.99

.60
3.56

n.a.
n.a.

.57
.55

.56
.57

.64
.60

.52
.53

.62
.61

.51
.54

.44
.46

n.a.

.27

.28

n.a.

.29

.26

n.a.

Annual

Q2

Q3

Q4

All units
Permits
Starts

1.54
1.74

1.59
1.83

1.65
1.83

Single-family units
Permits
Starts

0.97
1.19

1.03
1.26

Sales
New homes
Existing homes

n.a.
n.a.

Multifamily units
Permits
Starts
Mobile home shipments

1. Regular monthly revision.
2. Preliminary estimates.
n.a.-not available.

II-10
NEW PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)

Millions of units
S2.4

2.0

1.6

1.2

.8

.4

0

RECENT CHANGES IN PRICES OF HOMES SOLD
(Based on seasonally adjusted prices)
Percent change (annual rate)
/

I

-'

/~

20

I
--- New Homes
Existing Homes

t

!i

1977
NOTE:

Quarterly data.

!
1978

1

I

I
1979

I

1979-Q4 is the average for October and November.

II-11
Residential Construction
Housing activity weakened noticeably toward the end of 1979.
Total private housing starts were at a 1.5 million annual rate in
December, virtually unchanged from November's reduced pace, but down
significantly from the 1.8 million unit rate that had prevailed during
the summer and early fall.

In addition, newly issued building permits

declined 5 percent in December and were more than 30 percent below
their recent September peak.
Multifamily housing starts fell 15 percent in December to a 456,000
unit annual rate.

These starts dropped throughout the fourth quarter,

following the bulge in HUD-subsidized starts that was associated with
the end of the fiscal year.

Although single-family starts increased in

December, for the fourth quarter as a whole these starts were 13 percent
below the third quarter rate.

In addition, total home sales declined

sharply in November; and as a result, even though the stock of houses on

the market was down, the ratio of unsold houses to monthly sales rose to
8.3, the highest level since March 1975.

Moreover, preliminary data

indicate another decline in home sales in December.
A distinct deceleration in home price movements provides further
evidence of weakening housing demand.

On a seasonally adjusted basis,

increases in the price of existing homes sold slowed considerably during
the first two months of the fourth quarter, while average prices of new
homes actually fell during that period.

Moreover, these trends in sales

prices have been reported for most regions of the country.

II-12

COMPONENTS OF CURRENT DOLLAR
BUSINESS INVESTMENT SPENDING
(Percentage change from preceding comparable period,
based on seasonally adjusted data)
1979
Q2

Q3

Q4

Nondefense capital goods
shipments

-. 6

5.4

0.8

Nonresidential construction
put-in-place

8.0

Dec. 1978
to
Dec. 1979

Oct.

Nov.

Dec.

0.4

-2.5

3.2

10.8

4.8

n.a. 4.5

-0.7

n.a.

17.1

10.9

5.1

n.a. 6.0

-0.8

n.a.

22.2

4.3

4.4

n.a. 2.5

-0.5

n.a.

10.7

1
1

Building

1
Nonbuilding

1. Percentage change from November 1978 to November 1979.

II-13

NEW ORDERS NONDEFENSE CAPITAL GOODS
Seasonally adjusted
Billions of current dollars,
Ratio scale

24

Total

22
20

18

16
Machinery

14

12

1977

1978

1979

II-14
SURVEY OF PLANT AND EQUIPMENT EXPENDITURES
(Percent change from prior year)

19791

All Business

Planned for 1980
McGraw-Hill
Commerce

14.7

9.5

10.9

Manufacturing

15.8

13

14.3

Durables

19.7

13

15.5

Nondurables

12.4

14

13.2

13.8

6

8.3

Mining

15.6

10

16.8

Transportation

26.6

3

10.4

Utilities

12.6

8

3.6

Communications, Commercial
and other

12.1

5

Nonmanufacturing

10.0

1. November Commerce Survey, based on actual data for the first three
quarters of the year and anticipations for the fourth quarter.

ERROR HISTORY OF THE COMMERCE DEPARTMENT ANNUAL SURVEY
(Percent change from prior year)

Year

Anticipated

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980

9.3
1.4
9.1
12.9
12.0
4.6
5.5
11.3
10.1
11.2
10.9

Actual

Error1

5.5
1.9
8.9
12.8
12.7
.3
6.8
12.7
13.3
14.72
n.a.

3.8
-.5
.2
.1
-.7
4.3
-1.3
-1.4
-3.2
-3.5
n.a.

1. Anticipated minus actual percent change.
2. Based on November Commerce Survey.

II-15
Business Fixed Investment
Shipments of nondefense capital goods increased about 3 percent
in December, primarily due to a sharp rebound by the construction equipment industry where a major strike was settled.

Nondefense capital

goods shipments had declined sharply in November, however, and for the
fourth quarter as a whole they were up only 0.8 percent.

Orders for

nondefense capital goods increased sharply in December, rising 8 percent.
This increase reflected a surge in new orders for aircraft and parts, a
volatile series with long production lead times, while nondefense
machinery orders, more indicative of short-run demand for capital equipment, rose only moderately.

Businesses continue to anticipate a slowing of capital spending
growth in 1980 from the 1979 pace.

The Commerce Department annual

survey, taken in November and December, reported that firms plan to
increase spending by 10.9 percent in 1980, compared with the 14.7 percent
rise now indicated for 1979.

Survey respondents expect capital goods

prices to rise about 10 percent during 1980, and the planned increase
in real plant and equipment outlays for 1980 is thus about 1 percent;
this compares with the 6 percent rise during 1979.

For the recession

years 1970 and 1975, the Commerce Department December survey indicated
increases in outlays that were about 4 percentage points larger than
actually occurred.
Inventory Investment
Inventory investment slowed in November, the most recent month
for which data are available.

The book value of total manufacturing

and trade inventories increased at an annual rate of $35 billion, down

II-16
BUSINESS INVENTORIES
(Billions of dollars; annual rate of change
in seasonally adjusted book values)

Q1

Q2

1979
Q3

Oct.

Nov.

41.5

49.1

56.3

45.5

46.5

35.4

Manufacturing
Durable
Nondurable

18.1
13.7
4.4

30.2
24.2
6.0

35.0
25.7
9.3

28.3
16.9
11.4

24.4
25.4
-1.0

32.6
26.3
6.3

Trade, total
Wholesale
Retail

23.5
12.8
10.7

18.9
13.2
5.6

21.3
4.7
16.6

17.2
12.6
4.6

22.1
4.7
17.4

2.8
-1.6
4.5

1978

Manufacturing and trade

DEALER STOCKS OF AUTOMOBILES
(Millions of units; seasonally adjusted,
end of period)
1979

1978
Q1
Total U.S.-made1
Standard
Intermediate
Compact
Sub-compact
Foreign-made

Q2

Q3

Q4

Nov.

Dec.

1.81
.46
.56
.54
.25

1.87
.57
.58
.53
.18

2.00
.70
.64
.52
.14

1.86
.54
.54
.57
.22

1.79
.55
.61
.36
.27

1.88
.57
.64
.42
.25

1.79
.55
.61
.36
.27

.70

.61

.43

.42

.49

.49

.49

1. Includes U.S.-made Volkswagons.

II-17

from the $50 billion average pace during the first ten months of the year.
Accumulation of trade inventories moderated considerably in November from
the fairly strong October pace, as a markedy slower rise in the book
value of retail trade inventories was partly offset by a small decline

in wholesale trade stocks.

At manufacturers, the rate of book value

accumulation picked up in November, with the inventory building concentrated in durable goods.

The largest increase was in the stocks of the

aircraft, missiles, and parts industry.

Shipments by manufacturing and

trade establishments were essentially unchanged in November, and the
stock-sales ratio for all manufacturing and trade edged up to 1.42 from
the October level of 1.41.
In December, dealer stocks of all U.S.-made automobiles appeared
to have moved further into line with sales, following six months of imbalances.

This adjustment reflected both the reduced level of auto

assemblies and the sales incentive programs that have persisted throughout most of the second half.

Stocks fell 90,000 units in December,

three times the decline in the preceding month, and stood more than
300,000 units below the July peak.

Excess inventories were still

apparent for some large and intermediate models, however, while stocks
of some small models remained in relatively short supply.

The decline

in total stocks evidently continued in January, since production was
reduced below the apparent pace of sales.
Government Sector
The federal government deficit, measured on an NIPA basis, is
now estimated to have been about unchanged in the fourth quarter from
the third quarter's annual rate of $11.2 billion, as a sharp 4.0 percent

II-18

PRODUCTIVITY AND COSTS
(Percent change from preceding period at compound annual rates;
based on seasonally adjusted data)
Q43 1Q3 Q4

19771

19781

1979

1.4
1.2
2.6
1.9
3.6

.8
1.1
1.6
.9
2.6

-2.0
-2.3
.6
-.5
2.3

-1.3
-1.4
3.5
-.1
9.0

-1.6
-.4
-1.5
-1.6
-1.5

7.3
7.5
8.0
8.3
7.1

9.1
9.1
8.7
8.4
8.7

9.0
8.9
9.1
8.8
9.6

8.8
8.5
8.1
8.0
8.1

6.9
8.9
8.2
7.5
9.8

5.8
6.2
5.3
6.2
3.4

8.3
7.9
7.1
7.4
6.0

11.3
11.5
8.5
9.4
7.2

10.3
10.1
4.4
8.0
-.9

8.7
9.3
9.8
9.2
11.4

Output per hour
Total private business
Nonfarm business
Manufacturing
Durable
Nondurable
Compensation per hour
Total private business
Nonfarm business
Manufacturing
Durable
Nondurable
Unit labor costs
Total private business
Nonfarm business
Manufacturing
Durable
Nondurable

1. Percent change from fourth quarter of preceding year to fourth
quarter of year indicated.

II-19
increase in receipts offset a similar increase in federal outlays.

The

7 percent federal pay raise, sharply higher Commodity Credit Corporation

(CCC) outlays, and increases in defense purchases all contributed to the
strong growth of federal expenditures.
The administration now estimates that spending and receipts on a
unified budget basis will total $564 billion and $524 billion, respectively,
in fiscal year 1980.

For fiscal year 1981, the administration has proposed

a budget with outlays of $616 billion, receipts of $600 billion, and a
deficit of $16 billion.

The revised 1980 budget estimates and the 1981

budget incorporate the effects of the embargo on grain sales to the Soviet
Union and the planned increase in defense spending.

The grain embargo is

expected to result in CCC direct purchases of $2.0 billion as well as
$0.8 billion for the acreage set-aside program in fiscal year 1980.

The

increase in defense spending in fiscal year 1981 reflects the decision
to raise the long-term rate of growth in defense budget authority from
the previously planned 3 percent in real terms to 5 percent.

(A detailed

description of the President's budget will be presented in an Appendix
in the Supplement to the Greenbook.)
State and local government employment increased about 40,000 in
December, more than twice the average monthly rise earlier in the year.
Employment was essentially unchanged in October and November, largely
as a result of a sharp reduction in the public service employment program
(part of CETA) beginning with fiscal year 1980.

At the end of November,

these jobs, which are aimed at hiring those unemployed for structural or
cyclical reasons, were more than 30 percent below their 600,000 peak in
August.

II-20
HOURLY EARNINGS INDEX1
(Percent change at compound annual rates;
based on seasonally adjusted data) 2

Dec. 77
to
Dec. 78

Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Total trade
Services

Dec. 78
to
Dec. 79

1979
Q1

Q2

Q3

Q4

Dec.

8.5

8.2

8.5

7.1

8.5

8.1

9.9

8.6
8.8
8.2
7.7

8.9
8.9
9.1
6.4

8.5
8.6
8.4
7.7

9.7
10.0
9.1
7.6

8.1
7.9
8.6
6.6

9.0
8.3
10.2
4.0

10.3
11.3
8.4
4.9

7.5
9.6
7.7

9.0
7.3
8.2

8.6
10.3
7.5

3.5
5.8
5.4

15.9
7.2
7.3

8.0
6.6
10.4

11.7
5.3
14.3

1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime pay in manufacturing.
2. Changes for other than monthly and yearly periods are compounded.
MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Percent change at annual rates)
1975
Wage-rate settlements
(1,000 or more workers)
First year adjustments
Average over life of contracts1
Wage and benefit settlements
(5,000 or more workers)
First year adjustments
Average over life of contracts1
Effective wage-rate adjustments
(1,000 or more workers)
Current settlements
Prior settlements
Escalator provisions

Average adjustment
1978
1976
1977

1979

8.4
6.4

7.8
5.8

7.6
6.4

7.4
6.0

11.4
8.1

8.5
6.6

9.6
6.2

8.3
6.3

8.9
6.6

8.7
2.8
3.7
2.2

8.1
3.2
3.2
1.6

8.0
3.0
3.2
1.7

8.2
2.0
3.7
2.4

8.8
2.8
3.0
3.0

10.2
7.8

1. Excluding cost-of-living adjustments.

II-21

Productivity and Labor Costs
Labor cost pressures remained intense in late 1979, reflecting in
part continued poor productivity performance.

Output per hour in the

private nonfarm business sector decreased at a 1/2 percent annual rate
in the fourth quarter to a level 2-1/4 percent below a year earlier.
This marked the fourth consecutive quarter of decline--the longest since
the 1974-75 recession, when productivity fell for seven quarters.
Hourly compensation in the private nonfarm business sector rose
at nearly a 9 percent annual rate in the fourth quarter; this increase,
combined with the drop in productivity, drove unit labor costs to a level
11-1/2 percent higher than a year earlier.

In December, wage rates for

nonfarm production workers, as measured by the index of average hourly
earnings, rose at a 10 percent annual rate to a level 8-1/4 percent above

a year ago.

Manufacturing wages also increased at a 10 percent annual

rate, somewhat above the gains registered earlier in the quarter, and
wages in the transportation and services sectors were also up sharply in
December.
"Effective" wage rate increases for workers covered by major contracts, which include new settlements, deferred increases, and cost-ofliving adjustment (COLA) payments, have been relatively moderate given
the acceleration of prices; they were 8-3/4 percent in 1979, up from
8-1/4 percent during 1978.

First-year wage-rate increases in major

collective bargaining settlements (those covering 1,000 or more workers)
averaged 7-1/2 percent in 1979, about the same as in the previous year.
Over the life of the contracts, annual wage advances excluding potential
increases under COLA clauses were set at 6 percent in 1979, down from

II-22

6-1/2 percent in 1978.

For larger units, where data are reported on

fringe benefits as well as wages, settlements provided increases of
about 9 percent in the first year, and about 6-1/2 percent annually
over the life of the contract (excluding COLAs).
Prices
Recent data indicate that inflation accelerated at the end of
last year.

In December, consumer prices increased 1.2 percent, a bit
As a result,

above the pace prevailing throughout most of the year.

the consumer price index (CPI) increased 13.3 percent over the year,
a marked speedup from the 9 percent rise during 1978.

Producer prices

of finished goods rose less in December than in recent months, reflecting a slight decline in prices of consumer foods, but were 12-1/2 percent above a year earlier; excluding food, the rate of increase in
these prices accelerated in December.
Consumer prices of energy items resumed their rapid rate of rise

in December.

As a result of recent hikes in crude oil prices, gasoline

and fuel oil prices rose 2-3/4 and 1-1/2 percent, respectively. Moreover, further large increases have been announced by major refineries
and will likely show up in the CPI during the next few months.

Addi-

tionally, transportation costs have been boosted by price increases for
new US.-made autos that were effective early in January.
Food prices at the consumer level picked up in December as meat
prices rose substantially following earlier increases in livestock
prices.

Food price behavior was quite volatile in 1979.

Over the year

these prices increased about 10 percent, moderately below the rise of
nearly 12 percent during 1978.

II-23

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1
Relative
importance
Dec. 1978

Dec. 77
to
Dec. 78

Dec. 78
to
Dec. 79

Oct.

Nov.

Dec.

100.0
25.4
45.2
7.2
38.1
29.4

9.2
11.9
8.4
8.0
8.5
8.0

12.5
7.5
17.8
62.7
9.3
8.7

12.5
-1.1
19.4
56.1
9.1
14.3

15.6
31.6
12.0
29.6
7.1
6.5

9.5
-1.5
15.7
28.5
12.8
10.2

Intermediate materials 3
Exc. food and energy

94.6
83.5

8.3
8.9

16.3
12.8

22.4
20.1

10.8
7.9

14.4
11.3

Crude food materials
Crude nonfood
Exc. energy 4/

58.6
41.4
11.2

18.3
15.6
21.3

11.1
26.6
18.1

5.8
33.7
52.5

23.9
24.1
47.3

-1.4
31.9
-3.3

Finished goods
Consumer foods
Consumer nonfood
Energy
Exc. energy
Capital equipment

1979

1. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
2. Relative importance weights are on a stage of processing basis.
3. Excludes intermediate materials for manufacturing food and animal
feed.
4. Also excludes agricultural nonfood materials.

RECENT CHANGES IN CONSUMER PRICES 1
2
(Percentage change at annual rates; based on seasonally adjusted data)
Relative
importance
Dec. 1978
All items
Food
Energy 3
All items less food
and energy 3
Commodities
Services
Memoranda:
Gasoline
Homeownership

Dec. 77
to
Dec. 78

Dec. 78
to
Dec. 79

1979
Oct.

Nov.

Dec.

100.0
18.2
8.5

9.0
11.8
8.0

13.3
10.2
37.4

11.8
9.1
12.6

11.7
6.5
1.2

14.8
16.0
23.0

73.3
35.9
37.4

8.5
7.6
9.3

11.3
8.8
13.7

11.9
7.7
15.0

14.0
11.4
13.3

11.1
10.1
15.6

4.2
23.6

8.5
12.4

52.2
19.8

21.0
23.0

20.6
25.6

32.4
20.8

1. Based on index for all urban consumers.
2. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
gasoline and motor oil, fuel
3. Not seasonally adjusted. Energy items:
oil and coal, gas and electricity.

II-24

In December, the CPI was boosted once again by a large rise in
the homeownership cost component.

Over the year, homeownership costs

contributed more than 1-1/2 percentage points and energy items 2-1/2
percentage points to the 4.3 percentage point acceleration in consumer
prices.

There also was some acceleration in the rate of price increase

outside these sectors, notably for new cars and rents.
In December, the BLS released five experimental estimates of the
change in consumer prices (shown as 12-month percentage changes only)
which are based on alternative approaches to measuring changes in homeownership costs.

These reflect both different price series and weighting

schemes and indicate increases in the total CPI during 1979 ranging from
10.8 to 13.2 percent, compared with the 13.3 percent rise in the published

CPI.
The recent surge in spot prices of precious metals contributed to
a significant rise in the December producer price index for intermediate
materials.

Between mid-December and mid-January spot market prices of

gold and silver exploded--apparently associated with developments in the
Middle East--suggesting the possibility of further upward pressure in
intermediate materials prices.

Large increases also have occurred in

prices of other nonferrous metals, such as copper, and in prices of
energy-related items such as chemicals and plastics.
Agricultural Developments
On January 4 the President announced that 1980 grain shipments
to the Soviet Union would be limited to 8 million metric tons, 17 million
tons less than the higher ceiling which had been approved earlier.
administration has estimated, however, that grain exports would be

The

II-25

FACTORS CONTRIBUTING TO THE CPI ACCELERATION, 1978 TO 1979
Relative
importance
Dec. 1978

Price change
1979
1978
- - Percent - -

CPI, All items
Food
Energy
Homeownership
Used cars
Other 2

Acceleration
(1979-1978)

-

-

Contribution
to acceleration in CPI
total

Percentage points - -

100.0

9.0

13.3

4.3

4.3

18.16

11.8

10.2

-1.6

-.3

8.50

8.0

37.4

29.4

2.5

23.56

12.4

19.8

7.4

1.7

3.15

13.6

2.2

-11.4

-.4

46.63

6.2

7.6

1.4

.7

1. Percent change from December of previous year to December of year
indicated.
2. Estimated.

II-26
reduced by this embargo by only 14 million tons since some reselling of
grain to the Soviets by other countries is anticipated.

In addition,

soybean exports to the U.S.S.R. are to be reduced by 1 million metric
tons.
To forestall possible sharp grain price reductions in response to

anticipated increased supply, the administration took several steps to
support these markets.

On January 8, it announced an offer to purchase

wheat, corn, and soybeans previously contracted for sale to the Soviet
Union from grain exporters at original contract prices.

In addition,

further actions were taken to encourage greater stockpiling of grain by

farmers through either the regular CCC loan program or through the
farmer-reserve program.
Trading in agricultural commodities was suspended for two days
following the announcement of the export embargo.

Prices of grain then

declined sharply in the first two trading sessions following the
President's announcement.

However, these prices began to recover as

the administration's intention to support farm prices at about preembargo levels became more evident.

As of late January, cash prices

for grain at terminal markets were at about the levels immediately
preceding the embargo.

However, for corn the prospect of bulging

domestic inventories over the next year has pushed futures prices
somewhat below pre-embargo levels.

II-27

CASH PRICES FOR FARM CROPS

W

-

4.8

$ per bushel
4.8

WHEAT

4.0

3.2

I

I III III

111111 I11

1 11 1

4.0

3.2

2.4

IIIIIIIII

2.4
3.2

2.8

2.0

SSOYBEANS
-

7

7

6

6

1978
1978

5

197
1979

/2January 80

1/31

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest data
Indicator
Period

Level

Month
ago

$ billions

Monetary and credit aggregates-1
Total reserves
Nonborrowed reserves

Net Change from:
Year
Three
months ago
ago

Per cent at annual rates

December
December

43.2
41.7

15.6
29.3

13.8
13.0

3.9
2.6

Money supply
M-1
M-2

December
December

382.1
952.6

5.4
5.4

3.1
6.8

5.7
8.4

M-3
Time and savings deposits (less CDs)
CDs2

December
December
December

1623.3
570.5
94.3

5.6
5.5
-0.7

6.1
9.4
6.2

8.0
10.2
-2.3

December
December

670.7
1134.3

5.8
3.3

5.0
3.1

7.4
11.4

Thrift deposits (S&Ls + MSBs

+ Credit Unions)
Bank credit

Net Change from:
Three

Latest data
Indicator
Period

Per cent
or index

Month
ago

months
ago

Year
ago

Market yields and stock prices
Federal funds

wk. endg.

Treasury bill (90 day)
Commercial paper (90-119 day)

"
"

"
New utility issue Aaa
Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)

1/23/80

13.77

.29

-1.37

3.73

1/23/80
1/23/80

12.08
13.02

-.12
-.67

-.52
.77

2.70
2.84

1/25/80
1/24/80
1/23/80

11.95
7.33
13.11

.67
.10
.56

.50
-.05
-.18

2.41
1.03
2.38

1/23/80
1/28/80

5.28
65.96

-.27
4.22

-.48
8.91

.04
9.11

Dividend price ratio (common

stocks)
NYSE index (12/31/65=50)

wk endg.
end of day

Net Change or Gross Offerings
Year to Date
Latest Year
1978
1979
ago
Data
Period
Credit demands
1/
Business loans at commercial banks1
Consumer instalment credit outstanding
Mortgage debt outstanding (major holders)1/3
Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings)
Federally sponsored agcy. (net borrowing)
U.S. Treasury (net cash borrowing)
1/
2/
3/
e -

December
November
October
December
January

December
December

1.5
2.4
9.5

1.4e
3.3e
1.6e
11.2

Seasonally adjusted.
$ billions, not at annual rates
Includes comm'l banks, S&Ls, MSBs, life ins. cos, FNMA, and GNMA.
Estimated

42.8
34.2
85.5
25.6e
42.7e
23.9e
37.3

34.8
38.8
93.0
19.8
48.5
23.2
53.5

DOMESTIC FINANCIAL DEVELOPMENTS

In response to incoming data suggesting that economic activity may
be less weak than anticipated over the near term and to recent decisions
to step up defense spending, corporate and Treasury bond yields have
advanced another 50 to 80 basis points since the January meeting and are
currently at historic highs.

Treasury bill rates, too, show net gains

(generally about 30 to 50 basis points) for the intermeeting period, while
private short-term rates are unchanged to up about 30 basis points.

Short-

term interest rates remain about 1/2 to 1-1/2 percentage points below their
late October peak levels.

In contrast to recent developments in other sec-

tors of the credit markets, municipal bond yields and primary mortgage
rates have remained essentially unchanged since early January.
The daily volatility of interest rates in the money market has subsided since October, although such fluctuations still tend to be somewhat
larger than they were before October 6.

Investor preferences for highly

liquid, low risk securities have remained strong.

Spreads between Aaa-

rated corporate bonds and long-term Treasury securities, for example, are
now around 120 basis points, compared with third- and fourth-quarter
averages of 60 and 100 basis points, respectively.
Extending the uptrend that began in late October, equity prices have
risen appreciably further in January, and many of the broad measures of
stock prices are currently at all-time highs.

The recent advances have

been led by higher share prices of energy-related firms and defense contractors.

III-1

II1-2
SELECTED FINANCIAL MARKETS QUOTATIONS

(percent)
19741
High

Change from:

1979-19802

FOMC
Oct.5

FOMC
Jan.9

Jan.29

FOMC
Oct.

FOMC
Jan.

Short-term rates
Federal funds 3

13.55

11.91,

13.94

13.77

2.09

-.17

Treasury bills
3-month
6-month
1-year

9.63
9.75
9.54

10.70
10.63
10.28

11.76
11.75
10.76

12.26
12.04
11.28

1.59
1.36
.91

.50
.29
.52

12.25
12.25
12.00

11.73
11.86
11.84

13.07
13.04
12.50

13.03
13.06
12.73

1.31
1.23
1.00

-. 04
.02
.23

12.58
12.64
12.30

12.09
12.50
12.80

13.33
13.36
13.33

13.17
13.37
13.60

1.25
.98
.95

-.16
.01
.27

13.78

12.45

14.59

14.05

2.55

-.54

14.01

12.79

14.56

14.20

1.65

-.36

12.00

13.50

15.25

15.25

1.75

.00

3-year

8.84

10.01

10.68

11.26

1.09

.58

10-year
30-year

8.14
n.a.

9.60
9.36

10.58
10.29

11.21
11.12

1.50
1.64

.63
.83

7.15

6.64

7.32

7.33

.69

10.61
10.52

10.22
10.25

-11.42

11.95
11.93

1.73
1.68

.51

10.03

11.35

12.85

12.89

1.52

.04

Commercial paper
1-month
3-month
6-month
Large negotiable CDs 4

1-month
3-month
6-month
Eurodollar deposit 3
1-month

3-month
Bank prime rate
Intermediate- and longterm rates
U.S. Treasury

(constant maturity)

Municipal

5

(Bond Buyer)

.01

Corporate Aaa
New issue 6
Recently offered7
Primary conventional
mortgages 7

Low8

FOMC

FOMC

FOMC

FOMC

Oct.5

Jan.9

Jan.29

Oct.

Jan.

577.60
32.89

897.61
63.39

850.09
62.72

874.40
65.49

-2.40
2.97

2.86
4.42

58.26
54.87

235.15
152.29

251.75
151.60

270.65
160.29

13.35
4.87

7.51
5.73

1974
Stock prices
Dow-Jones Industrial
NYSE Composite

AMEX Composite
NASDAQ (OTC)
1.
2.
3.
4.

Statement week averages except where noted.
One-day quotes except as noted.
Averages for statement week closest to date shown.
Secondary market.

5.
6.
7.
8.

One-day quotes for preceding Thursday.
Averages for preceding week.
One-day quotes for preceding Friday.
Calendar week averages.

III-3

More complete data for the fourth quarter confirm a widespread
weakening in credit flows in the private sector.

Short- and intermediate-

term business borrowing ws down sharply from earlier in the year, and a
reduction in long-term corporate security offerings more than offset a
slight rise in commercial mortgage formation.

The pace of home mortgage

growth also dropped significantly in the fourth quarter, and consumer
installment credit grew more slowly.

In contrast, borrowing by governmen-

tal units at all levels increased sharply in the fourth quarter and has
remained strong in January.
M-1 growth appears to have slowed to a 3-3/4 percent annual rate
in January, from a 5-1/2 percent annual rate in December, as growth apparently continued to be depressed by the net rise of interest rates since
last summer as well as by the recent slowing of economic activity.

Time

and savings deposit inflows to banks look stronger in January, and thus
M-2 may expand somewhat more rapidly this month than last.

Deposit

growth at thrift institutions appears to have slowed somewhat further in
January.
Monetary Aggregates and Bank Credit
The apparent slowing of M-1 growth in January is attributable to a
marked drop-off in the pace of demand deposit expansion.

Currency growth,

on the other hand, rebounded sharply-after three months of relatively
weak expansion--to account for over one-half of the growth of M-1.
Expansion of the interest-bearing component of M-2 accelerated a
bit in January, reflecting moderation in both net withdrawals from savings deposits and runoffs of large time deposits included in M-2.

At the

same time, growth of small time deposits has been sustained, apparently

III-4
MONETARY AGGREGATES
(Based on seasonally adjusted data)1
1980 Jan. '79
Q2 Q3 Q4PP
Jan.to

1979

Q1

Q2

Major monetary aggregates
1. M-1
2.
Currency
3.
Demand deposits
4. M-2

8.

Savings deposits

9.
10.

Individuals 2
Other 3

11.

12.
13.
14.

Q4P

Dec.

Jan.e Jan. '80e

' Percentage Change at Annual Rates
9.7

-1.3

9.1

3.8

11.1

11.3

-5.3

9.3

2.8
5.3

5. M-3
Bank time and savings deposits
6. Total
7. Other than large negotiable
CDs at weekly reporting banks

Q3

11.9

0.9
6.4
5.7

9.5
5.8
-11.8
-10.4
-30.6

10.5
1.1

20.3
17.6

9.3
-3.5
-4.0
0.0
18.4
35.9
-11.8

2.7

15.0

19.3

Time deposits

Small time 4
Large time4
Time and savings deposits subject to rate ceilings (8+12)

8.9
13.3
5.8
6.8
-5.5

14.6

25.7
4.1

11.5
-13.8
-12.6
-33.6
28.1
30.0
24.5

15.7

8.3

18.5

3.6
5.5
-9.8
-9.8
-18.5
14.7
27.8
-12.3

8.7
8.2
-6.9
-6.2
-9.4
16.8
26.2
-3.1

10.4

11.1

5.8
8.2
-1.7
4.3

8.1
10.7

-5.8
-5.3
-12.4
22.7
33.5
4.4

4.7
6.9
0.8
-4.2

12.4

Deposits at nonbank thrift institutions 5

15.

Total

16.
17.
18.

Savings and loan associations
Mutual savings banks
Credit unions

8.8
4.6
0.8
-

MEMORANDA:
19. Total U.S. govt. deposits 6
20. Total large time deposits 7
21. Nondeposit funds
22.
Other 8
23.
Net due to related foreign
institutions

8.4
9.2
2.2
19.3

11.3

6.2
8.8
0.0
-0.7

Average Monthly Change in Billions of Dollars -2.0
1.4
5.3
2.0

1.5
-6.3
4.8
1.3

0.7
2.6
5.2
2.2

-0.8
3.6
-4.3
-2.2

2.4
-1.9
-7.3
-1.0

1.6
0.6
n.a.
n.a.

0.0
0.0
n.a.
n.a.

3.3

3.6

2.9

-2.0

-6.3

n.a.

n.a.

1. Quarterly growth rates are computed on a quarterly average basis.
2. Savings deposits held by individuals and nonprofit organizations.
3. Savings deposits of business, government, and others, not seasonally adjusted.
4. Small time deposits are in denominations of less than $100,000. Large time deposits are
in denominations of $100,000 and above excluding negotiable CDs at weekly reporting banks.
5. Growth rates are computed from monthly levels that are an average of current and preceding end-of-month data.
6. Includes Treasury demand deposits at commercial banks and Federal Reserve Banks and
Treasury note balances.
7. All large time certificates, negotiable and nonnegotiable, at all CBs.
8. Consists of nondeposit borrowings of commercial banks from nonbank sources, calculated
as the sum of federal funds purchased, security RPs, other liabilities for borrowed money
(including borrowings from the Federal Reserve), and loans sold less interbank borrowings.

e-estimated.

n.a.--not available.

p--preliminary.

III-5

the result of good consumer response to the new 2-1/2-year certificate-as suggested by press reports--and a resumption of substantial sales of
6-month MMCs.

Deposit growth at thrift institutions appears to have

weakened slightly in January from the rates of recent months.

Growth is

likely to have been mainly in the form of time deposits with floating
rate ceilings, as sample data for early January suggest a rebound in MMC
flows and sizable S&L sales of the new 2-1/2-year certificate.
Investment by savers in nondeposit market instruments appears to
have increased in January.

In just the first three weeks of the month,

the growth of money market mutual fund assets surpassed the record
increase for a full month.

Noncompetitive tenders in the Treasury's

weekly bill auctions were also up strongly during this period.
After declining slightly in November, bank credit growth resumed
in December--albeit at a slow pace-and reports from large banks for early
January indicate a further pickup may be in process.

A reduction in hold-

ings of Treasury obligations in December was more than offset by acquisitions of other securities, mainly municipal bonds, and total investments
grew at a modest rate.

Total loans also increased slowly over the month,

reflecting a modest rebound of business lending-following a slight November decline--and continued strong growth of real estate loans.

The

January pickup of bank credit growth appears attributable mainly to an
acceleration of loan growth, particularly business loans.
With credit demands weak and core deposit growth somewhat stronger,
commercial banks reduced their managed liabilities by about $9 billion
in December.

The bulk of the decline was in net borrowing from banks'

foreign affiliates; about one-quarter of this reduction appeared attrib-

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data) 1

1979
Q1P

Q2P

Q3P

Q4P

Nov.P

Dec.e

12
months
ending
Dec.e

Commercial Bank Credit
1. Total loans and investments
at banks 2

2.

13.3

11.9

15.8

3.1

-0.5

3.3

11.4

7.6

5.4

8.5

3.5

3.0

2.1

6.4

2.1

3.8

1.7

-6.3

-12.6

-7.6

0.3

10.5

6.2

12.1

8.5

10.8

6.9

9.7

15.2

14.2

18.2

2.9

-1.7

3.7

13.2

Investments

3.

Treasury securities

4.

Other securities

5.

Total loans 2

6.

Business loans

20.5

16.6

22.7

5.0

-1.6

6.2

17.2

7.

Security loans

33.0

38.1

8.7

-90.2

-128.2

-13.0

-6.2

8.

Real estate loans

14.6

13.0

14.7

14.2

13.2

13.5

14.9

9.

Consumer loans

16.3

12.4

7.5

n.a.

6.0

n.a.

n.a.

10.

Short- and Intermediate-Term Business Credit -

Total short- and intermediate-

term business credit (sum of
lines 13,14 and 15)

20.8

20.1

27.4

n.a.

0.6

n.a.

n.a.

bankers acceptances

20.4

16.6

21.7

6.0

-0.4

4.7

17.2

Commercial paper issued by
nonfinancial firms 3

33.5

65.7

69.7

15.5

-33.6

69.1

53.4

13.

Sum of lines 11 & 12

21.4

20.3

25.7

6.9

-3.5

10.4

19.9

14.

Finance company loans to
business 4

16.6

17.7

9.4

n.a.

15.5

n.a.

n.a.

Total bankers acceptances
outstanding 4

24.8

23.3

74.9

n.a.

5.5

n.a.

n.a.

11.

12.

15.

Business loans net of

1. Average of Wednesdays for domestic chartered banks and average of current and preced-

ing ends of months for foreign-related institutions.
2. Loans include outstanding amounts of loans reported as sold outright to a bank's own
foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding
company (if not a bank), and unconsolidated nonbank subsidiaries of the holding company.
3. Average of Wednesdays.
4. Based on average of current and preceding ends of months.
e--estimated.
p-preliminary.
n.a.-not available.

III-7

utable to a decline in weekend Eurodollar activity undertaken to generate
cash items and thus reduce reserve requirements against net demand deposits.

Banks also cut back on other nondeposit borrowing by about $1 bil-

lion on balance.

On average during December, managed liabilities subject

to marginal reserve requirements dropped to about $3-1/4 billion-from
$5 billion in November--with member banks accounting for nearly all of
this total.
Business Sector Finance
The resumption in December of business loan expansion at banks (net
of bankers' acceptances held) is attributable entirely to large banks,
with loans by these banks to Shell Oil Company accounting for about threeBusiness loan growth

quarters of their total business loan expansion.

slowed at foreign-related institutions in December and turned slightly
negative at small banks.
The further sluggishness of bank business lending in December
appeared attributable mainly to continued weakness of business demands
for short- and intermediate-term credit associated with a reduced rate
of inventory accumulation.

In addition, businesses shifted a larger

share of their borrowing into the commercial paper market, perhaps to
take advantage of the widening of the spread between paper rates and
bank prime rates.
Comparison of the August and November Surveys of Terms of Bank
Lending suggests that rates banks charged on small loans rose less over
this period than those charged on large loans.

Thus, it appears small

businesses have not experienced the inordinate increase in cost of funds
at banks which some observers thought might occur.

GROSS OFFERINGS OF CORPORATE AND FOREIGN SECURITIES
(Monthly totals or monthly averages; in millions of dollars)

1979
H1

QIII

1980
QIV

p

Dec.p

Jan.p

Feb.

Mar.

---------------------- Seasonally adjusted ---------------------Corporate securities--total

4,335

4,825

3,600

3,175

3,900

3,450

3,600

Publicly offered bonds

2,125

2,425

1,875

1,650

2,200

1,900

2,000

Privately placed bonds

1,555

925

1,025

1,000

900

900

900

655

1,475

700

525

800

650

700

Stocks

-------------------- Not seasonally adjusted -------------------Publicly offered bonds--total
By quality
Aaa and Aa
Less than Aa

2,280

2,125

1,850

1,450

2,400

1,225
1,055

1,275
850

950
900

650
800

575
875
675

1,080
575
195

1,325
125
0

517

435

375

550

300

300

1,315
535
550

408

2,600

1,600
800

700
635
945

1,800

By type of borrower
Utility
Industrial
Financial

Foreign securities--total 4

p--preliminary. f--forecast.
1. Bonds categorized according to Moody's bond ratings.
2. Includes issues not rated by Moody's.
3. Includes equipment trust certificates.
4. Includes both publicly offered and privately placed bonds.

III-9

Gross public offerings of corporate bonds increased to $2.2 billion
in January, seasonally adjusted, substantially above the reduced levels
for the previous two months.

The heavier volume reflected continued large

offerings by public utilities and a resurgence of issues sold by financial
concerns (mainly finance companies).

Public offerings of bonds by indus-

trial corporations also increased, but remained below last year's monthly
average.

Larger industrial corporations apparently are still reluctant

to issue call-protected bonds at current unprecedented levels of interest
rates, even though aggregate balance sheet ratios point to a marked erosion of liquidity.
Stock prices have climbed, on average, about 2 percent since the
January FOMC meeting, and trading volume has been extraordinarily heavy.
Most broadly based indexes of NYSE-listed issues are currently 2 to 3
percent above pre-October 6 levels, and the AMEX and NASDAQ indexes are
at their record highs.

The major stock price indicators have posted

cumulative gains of 7 to 33 percent since late October, reflecting in
part sizable increases in share prices of firms dealing in metals, petroleum, and natural gas products and, more recently, of aerospace and military hardware companies.
Government Debt Markets
The Treasury has issued an additional $4.4 billion of marketable
debt and $1.3 billion of nonmarketable debt in January.

Slightly over

half of the marketable total was obtained by adding to regular weekly
and monthly bill auctions, a continuance of the increased fourth-quarter
emphasis on bill financing.

The remainder was raised through a $1.5

billion sale of a 15-year bond and by adding to a 2-year note refunding.

GOVERNMENT SECURITY OFFERINGS
(Monthly totals or monthly averages, billions of dollars)

1979
H1

QIII

1980
QIVe

Dec.

Jan.

Feb.

Mar.

------------------- Seasonally adjusted -----------------State and local government
securities, gross offerings
Total
Long-term
Short-term
U.S. government securities,
net offerings
U.S. Treasury
Sponsored agencies

5.07
3.35
1.72

5.49
3.58
1.91

5.55
4.15
1.40

5.60
4.00
1.60

5.00
3.00
2.00

4.55
2.60
1.95

5.20
3.60
1.60

3.28

1.69
0.73

3.94
2.83

3.57
2.63

5.34
1.68

9.13
2.81

4.77
2.43

2.22

Not seasonally adjusted ---------------State and local government
securities, gross offerings
Total
Long-term
Short-term

5.42
3.54
1.88

5.26
3.38
1.89

5.07
3.89
1.18

4.60
3.30
1.30

4.50
3.00
1.50

4.50
2.80
1.70

5.50
3.80
1.70

U.S. government securities,
net offerings
1
U.S. Treasury
Sponsored agencies

1.97
2.09

2.17
1.31

6.03
2.53

5.76
1.65

4.43
1.29

12.60
1.82

6.00

e--estimate. f--forecast.
1. Marketable issues only.

2.25

III-1

Two DM-denominated note issues (maturities of 2-1/2 and 3-1/2 years) were
sold in the German money market in late January to raise $1.1 billion
equivalent, and this accounted for most of the nonmarketable issues sold
by the Treasury over the month.
Federally sponsored credit agencies are expected to borrow about
$1.7 billion in January, down substantially from the monthly average of
the fourth quarter.

The Federal Farm Credit Banks are continuing to

raise money at last year's record pace, but borrowing by FHLB and FNMA
has slowed considerably.
money this month.

The FHLBs are expected to raise little, if any,

FNMA is expected to borrow only about $500 million

(seasonally adjusted), about $200 million less than its expected net
mortgage acquisitions; the difference will apparently be financed by
reductions in other assets.

The substantial volume of mortgages pur-

chased by FNMA continues a trend that began in the fourth quarter and
reflects the rising differential between interest rates on FNMA's outstanding commitments and current levels of mortgage rates.
Bond offerings by state and local governments dropped to $3 billion
in January (seasonally adjusted), about $1.2 billion below the fourthquarter monthly average.

A sharp drop-off in hospital financing bonds

due to new restrictions on federal guarantees of such issues partly
explains this cutback.

Single-family housing revenue bonds accounted for

about 30 percent of the total municipal bonds offered in January, up from
an average level of 13 percent in the fourth quarter.
Demand for tax-exempt securities has continued to be firm, and
offerings coming to market in January have been well received.

Casualty

insurance companies and banks reportedly are acquiring municipal securi-

III-12

NET CHAN G E IN MORTGAGE DEBT OUTSTANDING
(Seasonally adjusted annual rates, in billions of dollars)
1978
___Q4

1979
Q4 e

Q1

Q2

Q3

160
124
114
10

158
119
110
9

164
118
111
7

162
116
104
12

158
110
97
13

36
25
11

39
23
16

46
28
18

46
29
17

49
32
17

35
52
6
13
9
14
8
23

33
45
6
11
12
13
4
34

34
51
4
11
8
14
4
38

34
43
4
13
2
25
5
36

33
33
2
17
10
25
5
34

By type of debt:
Total
Residential
Homes
Multifamily
Nonresidential
Commercial
Farm

By type of holder:
Commercial banks
Savings and loans
Mutual savings banks
Life insurance companies
FNMA and GNMA
GNMA pools
FHLMC and FHLMC pools
Other

1. Includes mortgage pools backing securities guaranteed by the Farmers
Home Administration and sold to the Federal Financing Bank.
e--partially estimated.

III-13

ties in volume; municipal bond funds also have been growing rapidly in
recent months.

With offerings of tax-exempt issues down somewhat and

demand for such issues remaining strong, yields on municipal bonds have
remained unchanged in January in the face of the advances in corporate
and Treasury bond yields.
Mortgage Markets
The sharp tightening of conditions in home mortgage markets that
began in October continued through the end of the quarter.

New mortgage

commitments made by S&Ls fell another 15 percent in December, following
a drop of 40 percent the previous month.

Despite a sharp cutback in

mortgage acquisitions, the level of outstanding commitments at S&Ls
declined by 5 percent in December to $28 billion, the lowest level since
mid-1977.

For the fourth quarter as a whole, net residential mortgage

lending by nonbank thrift institutions dropped by about one-fourth.
There are some signs that, within the primary market, the extreme
tautness of the home mortgage market that characterized the fourth
quarter may be easing, at least slightly, in January.

A special FHLBB

survey of commitment policies at large S&Ls indicated that about 40 percent of the 130 institutions contacted had liberalized their commitment
policies in some way during the first half of January.

By mid-January,

12 of the large S&Ls were still not making any new commitments, but this
compares with 30 associations that had closed their commitment windows
in October after the System's actions.

About three-fourths of the S&Ls

reported that the volume of new commitments in mid-January was substantially smaller than a year earlier, a slightly lower proportion than
during the latter half of December.

III-14

INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS AT SELECTED S&Ls
Conventional home mortgages
Basis
Average
point
rate on
Spread1
change
new com(basis
from
mitments
month
points)
for 80%
loans
or week
(percent)
earlier

Period

1979-High

12.90

4
11
18
25

+174

88

--

+64

54

11.09
11.30
11.64
12.83
12.90

1979--Aug.
Sept.
Oct.
Nov.
Dec.

-

10.38

Low

1980--Jan.

Percent of
S&Ls with
mortgage
funds in
short
supply 2

0
+21
+34
+119
+7

+160
+143
+79
+147
+158

77
83
83
86
85

12.85
12.90
12.87
12.89

-5
+5
-3
+2

+141
+136
+118
+96

87
85
84
85

1. Average mortgage rate minus average yield on recently offered Aaa
utility bonds.
2. Percent reporting supply of funds slightly or substantially below
normal seasonal patterns.

III-15

Some large S&Ls (and banks) in California reportedly cut their
prime mortgage rates by 1/4 percentage point around mid-January.

In

other sections of the country, however, such rates have been raised, and
thus the average rate paid in the Nation remains just below the record
high 12.90 percent level which prevailed throughout December.1 In the
secondary market for home mortgages, yields on GNMA-guaranteed securities
have stayed about in line with the rising yields on intermediate-term
Treasury issues.

Average yields in the January 21 FNMA auctions of for-

ward purchase commitments increased markedly as the volume of bidding
picked up.

The auction price for government-underwritten home loans

bearing the current 11-1/2 percent ceiling rate fell to 90.6, implying
deep discounts on loans originated in the primary markets.
Consumer Credit
Consumer installment credit growth slowed to an annual rate of 7-1/2
percent in December, according to preliminary data, lowering the annual
rate of advance during the fourth quarter to about an 8-1/2 percent annual
rate.

Growth in automobile credit in particular slowed markedly over the

quarter but the pace of advance in other types of consumer credit also
moderated.
Increasing problems with repayment of consumer loans became evident
during the third quarter, the latest period for which delinquency data
are available.

The delinquency ratio for closed-end consumer installment

1. In January, the average rate on new commitments rose 50 basis points
in the Southwest. This largely reflected a sharp rise in lending rates
in Texas which followed federal preemption of state usury laws enacted
The FHLMC has attempted to produce a consistent rate
near year-end.
series unconstrained by usury limits, but rates in Texas had been
carried in the series at their 12 percent usury ceilings.

SECONDARY HOME MORTGAGE MARKET ACTIVITY

FNMA auctions of forward purchase commitments
Conventional
Government-underwritten
Amount
Yield
Amount
Yield
($ millions)
to
($ millions)
to
Offered Accepted
FNMA1
Offered Accepted
FNMA1

Period
1979--High
Low
Dec.

1980--Jan.

454
19
3
10
17
26
31
7
14
21
28

172
18

13.97
10.92

1,035
37

448
19

13.29
10.42

207

73

12.98

305

119

12.42

206

80

12.99

344

131

12.55

220

133

13.10

199

100

12.70

223

114

13.29

317

132

13.11

Yields on
GNMA-guaranteed
mortgage-backed
securities for
immediate
delivery 2
12.10
9.51
11.29
11.18
11.49
11.39
11.39
11.63
11.51
11.92
12.10

1. Average gross yield before deducting fee of 38 basis points for mortgage servicing. Data,
based on 4-month FNMA purchase commitments, reflect the average accepted bid yield for home
mortgages, assuming a prepayment period of 12 years for 30-year loan without special adjustment
for FNMA commitment fees and related stock requirements. Mortgage amounts offered by bidders
relate to total eligible bids received.
2. Average net yields to investors assuming prepayment in 12 years on pools of 30-year FA/VA
mortgages carrying the prevailing ceiling rate on such loans.

III-17

loans at comercial banks reached the highest level in four years, though
well below the record highs of 1974 and 1975, and the delinquency ratio
for bank credit card accounts moved up sharply to a new high in September.

The percentage of loans delinquent at major automobile finance companies
was little changed, however, after the pronounced rise during the second
quarter.
Home mortgage delinquencies, as reported to the Mortgage Bankers
Association, presented a mixed picture in the third quarter.

The per-

centage of home mortgage loans delinquent 60 days or more was little
changed from the second quarter, but there was a large rise in 30-day
delinquencies that may presage increases to come in the critical 60-dayand-over category.

The Federal Home Loan Bank Board series on mortgage

loans delinquent 60 days and over increased somewhat in December after
having remained flat in October and November.

III-18
CONSUMER INSTALLMENT CREDIT 1

1979
Nov.r

Q4P

1977

1978

Q3

35.3

37.3
12.8

26.1

52.9

44.8
19.4
53.1

32.7

254.1
46.4

298.4
47.8

218.8
16.8

Change in outstandings
Billions of dollars
Percent
Extensions
Billions of dollars

Dec.P

Total

Change in outstandings
Billions of dollars
Percent
Bank share (percent)
Extensions
Billions of dollars
Bank share (percent)

28.9
9.5

23.2
7.6

22.6

11.8

21.6

332.3
45.9

320.5
44.9

317.6
44.4

311.7
44.3

253.5
17.4

294.9
18.0

294.4
17.5

288.7
17.2

288.5
17.0

15.2
22.5

19.6
23.6

12.1
11.0

6.0
5.4

6.4
5.6

75.6

89.0

94.2

87.2

84.8

18.2

8.6

Liquidations
Billions of dollars
Ratio to disposable income

Automobile Credit

5.6
4.9

84.8

1. Quarterly and monthly dollar figures and related percent changes are
seasonally adjusted annual rates.
p--preliminary.
r--revised.

APPENDIX A
A REVISED METHOD FOR CALCULATING THE HIGH EMPLOYMENT BUDGET

As a result of a joint staff project by representatives of the
Board, CEA, OMB, Commerce, and Treasury, a new methodology for estimating the high employment budget (HEB) has been adopted by these
agencies; it is introduced in this Greenbook as well as in the

Council's Economic Report.
The old and new methods differ markedly. The new method starts
with estimates of actual receipts and expenditures and then adds to
these actuals the calculated revenue and spending increments to actual
values that would occur as the gap between actual and potential GNP
is closed. 1 In contrast, the previous method does not "build-up"
from actuals; rather it attempts to calculate directly the level of
high employment receipts and expenditures. Because of the difference
in approach, the new method has a number of advantages.
Since the new method adjusts to actual values, it avoids the
lack of consistency between the actual and high employment budget
sometimes found in the old method. In the latter this problem arose
because projections of high employment income shares and tax rates-based largely on historical trends of income shares and tax rates-were unlikely to incorporate fully the projected structural changes
in the economy that were embodied in forecasts of actual income
shares and effective tax rates. As a result of this inconsistent
use of information, projections of actual and high-employment
receipts would sometimes yield an implausible elasticity of receipts
with respect to changes in income between actual and potential GNP.
Such problems are avoided by the new approach, as forecasts of
high employment revenues are developed by projecting actual receipts-which reflect new tax legislation and projected structural changes in
the economy--and then adding to these receipts the extra revenues that
would be collected if the gap between actual and high-employment GNP
were closed. Estimates of these additional revenues are based on the
historical behavior of income shares and effective tax rates over the
business cycle and on projected values for actual and potential GNP.
Thus, the additional revenues gained in closing the gap do not include
any particular projected structural changes, but high employment revenues--the sum of these additional revenues and projected actual
receipts--do include the bulk of such structural changes. Because
of this, the implied elasticity of receipts with respect to changes
in income between actual and potential GNP is more plausible than
under the previous method.
1. The additions to actual values are derived from econometric equations. In the case of personal tax receipts, for example, the additional personal tax revenues associated with a closing of the gap are
calculated by applying an estimated 1.33 tax elasticity to the difference between an estimated value for high employment adjusted personal
income (based on an income share equation) and an estimated value for
actual adjusted personal income (based on the same income share equation).

Another advantage of the new method, on the receipts side, is
its relatively heavy use of actual receipts, while estimates of
variables like high employment GNP and income shares are only used
in the calculation of adjustments to actual values, or "gross-ups,"
not in the calculation of high employment receipts per se. In contrast, the prior method abstracted completely from actual receipts,
using only variables inherently difficult to estimate such as real

GNP, income shares, and effective tax rates, all evaluated at a
hypothetical high employment level of economic activity.
A comparison of the HEB estimates resulting from each method
for the forecast period are presented in table 1. In this comparison,
the two series are based on the same assumptions about income shares,
tax elasticities, and the economy. As can be seen, the levels of the
HEB using the new method tend to lie below those using the old method.
However, the changes tend to move together, providing essentially the
same impression about the direction or thrust of fiscal policy. Both
series indicate a substantial move toward fiscal restraint in the
coming two years. This restraint is due in large part to the imposition of the windfall profits tax, increase in social security taxes,
and the interaction of inflation with the progressive personal income
tax structure.
In addition to developing an improved approach for calculating
the HEB, much work has been done on improving estimates of its underlying components such as income shares, effective tax rates, and tax
elasticities. In addition, cyclical adjustments of expenditures have
been made for several federal expenditure programs in addition to
unemployment insurance. A brief technical description of this work
comprises the remainder of this Appendix.
Estimates of Income Shares
In the past, estimates of full employment income shares have
been based on an interpolation between share values in actual full
employment periods. In contrast, under the new approach each share
is specified as a linear function of time and current and lagged
values of the percentage GNP gap. Such equations--explaining the
shares of all major components of national income and also the
difference between GNP and national income--are then jointly estimated. This estimating procedure guarantees that the shares sum to
100 percent of GNP and that the sum of the gaps between estimated
actual and high employment values for income components equals the
gap between actual and potential GNP. One important result revealed
by the analysis is that as the GNP gap is closed approximately 20
percent of the increased income is allocated to corporate profits
and 75 percent to compensation of employees.
1. The major components of national income explicitly considered are
wages and salaries, other forms of compensation, nonfarm proprietors'
income, farm proprietors' income, corporate profits, and rent plus
net interest.

Estimates of Tax Elasticities and Rates
Much effort was made to improve existing estimates of the personal income tax elasticities. An inter-period elasticity is used

in estimating actual personal receipts over time and captures the
effects on tax receipts of both inflationary and real income gains.
In contrast, an intra-period elasticity is used in calculating at a
point in time the extra revenues associated with a closing of the
gap between the estimated actual and high employment levels of
adjusted personal income. In order to control only the path of real
economic activity, closing of this gap is assumed to involve no
change in the price level; this means that the intra-period elasticity captures the effects on receipts of only real income gains due,
for example, to increases in employment, hours worked, and productivity.
To estimate these elasticities both time series and crosssectional analyses were employed. The time series analyses related
personal tax receipts--adjusted for changes in the relevant tax law-to adjusted personal income, with many functional forms and sample
periods tried. This analysis tended to support the 1.45 personal
income tax elasticity underlying past projections of actual receipts.
The cross-sectional analysis utilized the "tax-file model" of the
Department of the Treasury's Office of Tax Analysis. Analysis using
It required
this model was performed for several years in the 1970s.
employment and the components of adjusted
estimates of changes in both
personal income that would occur with a closing of the GNP gap. The
former was derived using the CEA's potential GNP model and the latter
from the analysis of income shares. Further, the model required estimates of the productivity, income distribution, and filing status of
the extra employed persons, with the results of the exercise particularly sensitive to these factors. A final value of 1.33 was chosen
for the intra-period personal income tax elasticity.
The marginal corporate tax rate used in the calculation of the
additional corporate tax revenues gained in closing the gap was derived
using time series analysis. An equation was estimated relating federal
corporate profits tax receipts (net of Federal Reserve System profits)
to a profits tax base (adjusted for Federal Reserve System profits,
profits from the rest-of-the-world sector, and state and local corporate tax payments) and the investment tax credit. The estimated
relation was very precise and implied a marginal corporate tax rate
around 40 percent in recent years.
Calculation of the additional contributions for social insurance
associated with closing the GNP gap involved an examination of the
disaggregated components of these contributions. 1 This disaggregated
1. The disaggregated components were social security taxes excluding
those paid by the self-employed and railroad retirement taxes; social
security contributions by the self-employed; unemployment insurance
taxes; and other taxes (including federal employee retirement contributions, supplemental medical insurance premiums, veterans life insurance
payments, and workmen's compensation).

A-4
approach was thought important because social security taxes have
increased since the 1950s to a major fraction of total receipts.
The analysis involved estimation of separate tax bases and tax

elasticities for each category (except other taxes, which was assumed
to be noncyclical).

The tax bases were derived from estimates of

income shares and the proportion of income generated by employees
covered by each program. The tax elasticities--capturing the sensitivity of social insurance contributions to changes in earnings--were
computed as a weighted average of an employment elasticity (assumed
to be 1.0 as the gap closes) and an average wage elasticity (based
on simulations of the Social Security Administration revenue estimating model). For example, the elasticity for social security taxes
with respect to wage increases (excluding those paid by the selfemployed) was around .80 in 1979, having increased from .60 in 1970
because of the sizable increase in the taxable earnings base relative
to average earnings over the period. As a result the weighted tax
elasticity has risen from around .80 to .90 over the same period,
where the weights were based on the proportion of the increase in
wages and salaries in closing the gap attributable to the associated
increase in average wages (due, for example, to gains in productivity
or hours) and employment.
Indirect business taxes are comprised of specific and ad valorem
excises, customs duties, and nontax accruals, with specific excise taxes
amounting to over half the total. Calculation of the responsiveness
of these taxes to changes in real GNP was based on commodity demand
studies. According to these studies, most of the taxes are on products for which demand is inelastic with respect to income, implying
that the elasticity of total indirect business taxes with respect to
real GNP is less than unity. Moreover, this elasticity has declined
from a value of .84 in 1955 to .63 at present due largely to the repeal
of many cyclically sensitive excise taxes, such as the automobile
excise tax.
Estimates of Expenditure Adjustments
In the past the only expenditure program adjusted for a closing
of the GNP gap and the associated reduction in the unemployment rate
was regular unemployment insurance benefits. Under the new method
cyclical adjustments have also been made for extended unemployment
insurance, food stamps, aid to families with dependent children, old
age and survivors insurance, disability insurance, medicaid,and veterans benefits.
The adjustment for regular unemployment insurance benefits has
been reestimated on the basis of a regression equation relating total
benefits to the insured unemployment rate, labor force, and the size
1. Examples of such products are alcohol, tobacco, and fuel.

of average weekly benefits. The results suggest that regular benefits
rise around $2.5 billion for each 1 percentage point increase in the
unemployment rate. In addition, the cost of extended benefits is estimated to rise smoothly to nearly 100 percent of regular benefits as the
unemployment rate rises to 7.5 percent. At rates above 7.5 percent,
the cost of extended benefits rises sharply to around twice the cost
of regular benefits since several state programs are then triggered into

operation. Estimates of the cyclical adjustments for the other expenditure programs mentioned above are based on extensive analysis by many
government agencies on the cyclical sensitivity of these programs to

changes in the unemployment rate. Expenditures on these programs are
estimated to increase by around $1 billion for every percentage point
rise in the unemployment rate above the benchmark rate of 5.1 percent.

This Appendix was prepared by Darrel Cohen, Economist, Government Finance
Section in the Division of Research and Statistics.

Comparison of High Employment Surplus Estimates Using Old and New Methods
(billions of dollars)

FY'79

FY'80

FY'81

1979:4
to
1980:4

1980:4
to
1981:4

83.5

4.0

19.0

61.1

23.4

47.1

83.4

4.3

11.2

59.7

17.8

53.0

FES

1979:4

1980:1

1980:2

1980:3

1980:4

1981:1

1981:2

1981:3

1981:4

Old

13.0

17.2

24.1

21.6

36.4

65.1

67.1

75.8

New

12.6

6.6

13.2

12.5

30.4

60.2

73.8

74.1

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets
The weighted-average foreign exchange value of the dollar is
slightly higher than its value at the end of 1979; the dollar declined
about 1 percent in the first week of January, but it has risen steadily
since to recoup its earlier losses.

The political and economic uncer-

tainties arising from developments in Iran and Afghanistan continue
to dominate exchange markets, and rate movements in particular currencies have often been volatile.

Some commodity markets have also

been affected, and the gold price skyrocketed to over $850 per ounce
at one point, but has since dropped back to around $700.
In foreign exchange markets the yen has shown the largest daily
fluctuations and has moved over a wide range, but it is currently
trading at its year-end level.

The pound has experienced daily fluc-

tuations of nearly 1 percent during this period but has generally
moved higher to a level nearly 2 percent higher than at year-end.
The EMS currencies, including the mark, are generally about 1/2
percent lower than at year-end.

. The Bank
of Sweden
on January 18,

raised its discount rate 1 percentage point

to 10 percent citing external considerations.

IV-1

CONFIDENTIAL (FR)
Class II -FOMC

IV-2

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

March 1973=100
90

Series
-89

-88

-

87

86

S85

IIll I I
October

November

December

January

84

IV-3

In late January,
the System also repaid its small Swiss franc swap debt.

IV-4

OPEC surpluses and investment flows in 1979.

The OPEC current

account surplus is estimated to have risen from $7 billion in 1978 to
$65 billion in 1979 as a result of the steep increase in oil prices.
(A still larger surplus of about $110-115 billion is currently being
projected for 1980, in consequence of the further oil price increases in
late 1979 and early 1980.)

OPEC oil revenues rose from $130 billion in

1978 to about $200 billion last year.

OPEC imports, in contrast, rose

only about 4 percent in 1979, to an estimated $104 billion, the small
rise resulting from slower growth of economic activity and import demand
in some countries and from a precipitous drop in imports in Iran.

The

OPEC deficit on net services and private transfers continued to widen
quite rapidly, but in absolute terms that rise was dwarfed by the
increase in oil revenues.

The bulk of the current-account surplus was

concentrated in the second half of the year, in reflection of the
especially sharp oil price increases between April and July 1, and is
estimated to have run at a quarterly rate of around $20 billion in each
of the final two quarters.
OPEC external investment flows which can be identified amounted to
about $24-1/2 billion in the first three quarters of 1979, equal to
55 percent of the current account surplus in the same period.

Reported

investments in the United States, the United Kingdom, the Eurocurrency
market, other bank deposits, and international organizations came to only
$3.7 billion in the first two quarters but increased to almost $21 billion in the third; a relatively small part of that increase can be
attributed to the lag in payments for oil exports.

For the nine months,

IV-5

ESTIMATES OF OPEC CURRENT ACCOUNT AND EXTERNAL INVESTMENTS
(Billions of dollars)
1978
Year

Q1

1979
Q3

Q2

Q4

Year

65
(62)

212
(201)
(11)
104
108

Current account

1.

2.
3.
4.

Exports
(Oil)
(Non-oil)
Imports
Trade balance (1-2)
Net services and

private transfers
5. Public transfers
6. Current account balance

141

(130)
(11)
100

38.5
(36)
(2.5)

47.5
(45)

(2.5)

61

(58)
(3)
29
32

(3)
34

19.5
19

21.5

-31
-3

-9
-1

-10

-10
-1

-10
-1

-39

-1

7

9

15

21

20

65

41

(3 + 4 + 5)

26

31

-4

External investments
Oct

T-t

2.

.9

-1.9

.7

-.1
.1

-. 8
-1.0

1.4
-. 6

.8

-.1

-.1

n.a.

n.a.

In United Kingdom
a. Liquid sterling

.2

.4

.4

.8

n.a.

assets
b. Other loans &
investments

1.

.1

.4

.4

.7

n.a.

.2

n.a.

In United States
a. Treas. bills &
bank deposits
b. Other securities
c. Other capital
flows1

3. In Eurocurrency market 3
4.

Int'l. organizations
Subtotal

5.

Other investments & net
borrowings (or
repayments) 4

.1

0

0

2.02

1.2
.3

3.0

3.6

.8

18.5

n.a.

.1

-. 2

-. 1

-. 4

n.a.

4.2

1.9

1.8

20.9

n.a.

2.8

7.1

.1

n.a.

13.2

Note: Numbers may not add to total because of rounding.
1. Including direct investment, prepayments for U.S. exports, and
deposits with nonbanks.
2. Incomplete totals.
3. Including domestic currency bank deposits outside the United States
and United Kingdom.
4. Including credit to oil companies reflecting payments lag.

IV-6

additions to OPEC Eurocurrency deposits, as well as to domestic-currency
deposits outside the United States and United Kingdom, totaled close to
$23 billion, accounting for the great preponderance of the identified
investments and amounting to one-half of the surplus.

Investments in

the United Kingdom came to $1.6 billion and those in the United States
to less than $1 billion (although third-quarter data are incomplete).
Following a net liquidation of their assets in the United States in the
first half of the year, the OPEC countries increased their holdings in
the United States by at least $3.5 billion in the four months JulyOctober.

However, these increases were a rather modest share of the

total worldwide OPEC investment flows, and partial data for the rest of
the year do not suggest much if any pick-up in the share of total OPEC
investments flowing to the United States.

IV-7

U.S. International Transactions
The trade data for December are not yet available on an international accounts basis.

On the census basis, the trade deficit for

the fourth quarter was about the same as the deficits in the second
and third quarters.

For the year as a whole the deficit was down some-

what from 1978.
Petroleum imports rebounded to 8.9 mbd in December from 7.9 mbd
in November (including imports into the U.S. Virgin Islands).

The

average for the fourth quarter, 8.7 mbd, was about the same as for the
second and third quarters.

The price of imported oil climbed about 8

per cent in December, to approximately $25 per barrel.

Since the mid-

December Caracas meetings, the only change in the OPEC price picture
has been the $2 per barrel increase, retroactive to January 1,
announced January 28 and 29 by Saudi Arabia, Kuwait, U.A.E., Qatar
and Iraq.

In contrast to official contract prices, spot prices have

been slipping.

The gap between spot and contract prices has fallen to

the $3 to $8 per barrel range from the pre-Caracas range of $15 to $20
per barrel.

The amount added to U.S. average import prices by spot

market purchases is likely to be smaller in January than in the fourth
quarter.
Agricultural exports are expected to total a record $37 billion
in 1980, despite the embargo on grain exports to the Soviet Union.

The

embargo is expected to have several secondary repercussions, in addition
to the direct loss of export sales to the Soviet Union.

There is likely

to be distress slaughter of Soviet livestock because of the lack of
replacements for U.S. feedgrains.

This will reduce world demand for

IV-8
feedgrains for several years.

On the other hand, the Soviets will have

little difficulty making up for the loss of U.S. wheat from other
sources.

The volume of U.S. wheat exports is likely to drop by only a

fraction of the lost sales to the Soviet Union because slightly lower
prices will also encourage sales to other countries.

The forecast for

agricultural exports for 1980 has been revised downwards by about $2
billion due to the embargo.
Turning to the capital accounts, the pattern of private and
official capital flows in November was similar to the pattern in October
and in the first half of 1979.

Large net official outflows were

accompanied by large net private inflows.
Official reserve holdings of the G-10 countries and Switzerland
in the United States fell by almost $8 billion in November.
dollars heavily to support the value of the yen.

Japan sold

German holdings fell

sharply because the Bundesbank engaged in liquidity tightening foreign
exchange swaps with German commercial banks.

In December and early

January several swaps originally designed to tighten liquidity matured
and new swaps were arranged to ease German money market conditions. As
a result German official holdings at the FRBNY went up again by about
the same amount.
In November, OPEC holdings of official reserve assets in the
United States increased by $1.9 billion; in October they had increased
$1.7 billion.

The net increase in OPEC assets in the U.S. during these

months was only about half this size.

The rest was the result of a

transfer of funds to the FRBNY from a special Treasury account.
U.S. reserve assets rose by $1.3 billion in November, chiefly
because of the Treasury's issue of mark-denominated notes. The sale of

U.S. International Transactions
(in millions of dollars; receipts, or increase in liabilities, +)

RESTRICTED

1977

1.
2.
3.

Trade balance 1/
Merchandise exports
Merchandise imports

4.

Change in net foreign positions of banking
offices in U.S. (excl. liab.to foreign official inst.)

1978

Year

Q4

1 9 7 9

1979

Q1

Q2

Q3

Sept.

Oct .

_Nov.

-30,873
120,816
-151,689

Through interbank transactions with
a) Own offices in foreign countries
b)
Unaffiliated banking offices in foreign countries

5.
6.

1978

Year

7.
8.

Through nonbank transactions
a)
Claims on nonbanks in foreign countries (increase,-)
b)
Liabilities to private nonbanks in foreign
countries (inc. custody liab.)

9.
10.
11.
12.

Private securities transactions,net (excl. U.S. Treas. Oblig.)
Foreign net purchases of U.S. corp. bonds
Foreign net purchases of U.S. corp. stocks
U.S. net purchases (-) of foreign securities

13.

Foreign net purchases of U.S. Treasury obligations 2/

14.

Change in foreign official reserve assets in U.S. (increase +)

-34,187
141,884
176,071

-6,369
39,315
-45,684

-6,115
41,348
-47,463

-7,716
42,792
-50,508

-7 282
47,337
-54,619

-3,909

-14.924

-13,697

14,681

4.798

617

-7,801

3.713

3,875

-2,718
-2,204

4,940
-4,520

-3,221
-6,423

15,327
818

6,753
-1,266

8,148
-2,310

-7,044
3-.

538
4,267

-2,065
4,950

-424
1,436

-16,431
1,089

-4,829
776

-1,006
-458

-2,017
1,327

-5,306
84

-1,292
213

-1,442
350

152
838

-3,068
1,112
1,326
-5,506

-688
1,117
1,686
-3,491

-116
506
297
-919

-537
*
424
-961

-77
278
274
-629

-1.970
6
142
-2,118

-941
105
17
-1,063

-116
165
-8
-273

-490
-123
53
-420

534

2,251

1.546

2,564

-239

1,579

55

36

1,079

35.448

31.471

16.853

-8,257

-10,293

5.747

1.195

-3,063

-5.302

-3.144 -2.383
15,500 17,318
-18,644 -19,701

-2.004
16,841
-18,845

15.
16.
17.

By Area
G-10 countries and Switzerland
OPEC
All other countries

29,414
5,743
291

29,955
-1,074
2,590

15,574
1,073
206

-7,101
-1,645
489

-11,613
248
1,072

4,808
1,761
-822

1,016
-510
689

-3,526
1,740
-1,277

-7,952
1,882
768

18.
19.

By Type
U.S. Treasury securities
Other 3/

30,266
5,182

23,869
7,602

13,309
3,544

-7,965
-292

-12,799
2,506

5,036
711

796
399

-2,430
-633

-7,071
1,769

-237

662

200

2,712

1,489

540

-1.267

2.105

15.416

1,583

-1,403

9.147

1,273

4.109

20.

Change in U.S. reserve assets (increase -)

21.

All other transactions and statistical discrepancy

-3,008 4/

446

672

13,081

1.7

-4.2

MEMO:
Current Account (bil. $.

seasonally adj., annual rates)

-14.1

-13.5

.3

n.a.

n.a.
c

International accounts basis, seasonally adjusted.
Includes U.S. Treasury notes publicly issued to private foreign residents.
Includes deposits in banks, commercial paper, bankers' acceptances, and borrowing under
repurchases agreements.
Includes $1,103 million of newly allocated SDR's.
Less than $500,00.

n.a.

IV-10

Carter notes is also reflected in foreign net purchases of U.S. Treasury
obligations in November.

An additional $1.2 billion equivalent of DM

Carter notes were issued in January.
Private capital flows reported by banking offices in the United
States showed a net inflow of $3.9 billion in November.

The net inflow

was more than accounted for by a reduction in banks' loans to unaffiliated
banking offices abroad.

After October 6, the U.S. agencies and branches

of foreign banks ran down their loans to non-affiliated foreign banks
and probably made them instead from their offices outside the United
States.

Partial data for December and early January indicate that this

process has now stopped.
U.S. banks reduced their net liabilities to affiliated foreign
offices by over $2 billion in November; partial data for member banks
indicated that net liabilities continued to decline in December.

Thus

it appears that U.S. banks did not fund additional domestic credit
activities from related offshore branches in the fourth quarter.

This

is in sharp contrast to the first three quarters of the year, when net
liabilities to foreign offices (Eurodollar borrowings) increased by $25
billion.
U.S. non-bank holdings of Eurodollar deposits reported by foreign
branches of U.S. banks have leveled off since August, after growing by
$10 billion in the first eight months of 1979.
billion at the end of November.

They totaled $28

Eurodollar CD holdings of open-ended

money-market mutual funds and short-term unit investment trusts continued to grow in December and January, reaching $8.3 billion by the
middle of the latter month.

IV-11

An informal survey of several brokerage houses indicates that net
foreign purchases of U.S. equities in the last two months of 1979 and
early 1980 may have been fairly substantial.

Foreign buying appears

to have been strongly motivated by international political developments
and has not lagged behind the rise in U.S. stock market prices as it
frequently has in the past.

IV-12

Foreign economic developments.

In most major foreign industrial

countries continued strength characterized economic activity during the
fourth quarter of 1979.

Industrial production for October-November was

up in Germany, Japan, the United Kingdom and Italy, although it fell in
Canada and in France.

In Germany, preliminary official estimates show

real GNP growth of 5 percent (a.r.) in the fourth quarter and places
year-over-year growth for 1979 at 4.4 percent.

These indicators

suggest that the momentum of economic growth leading into 1980 may be
greater than expected.
Inflation continued at a rapid pace in the major industrial
countries.

Price increases accelerated in Germany and Japan at the end

of last year; in Italy, prices advanced sharply in January, reflecting
largely the pass-through of recent oil price hikes.

A notable development in 1979 was the sharp drop in the combined
merchandise trade surpluses of major foreign countries -

for the six

major countries the trade surplus dropped from $46 billion in 1978 to an
estimated $4 billion in 1979.

The higher price of imported oil was the

principal cause of the huge declines in trade balances for Japan,
Germany, and France,

In Italy, increases in imports, as well as higher

oil prices, resulted in an enlarged deficit.

Trade surpluses in 1979

also declined relative to 1978 levels in the United Kingdom, despite a
reduction in the degree of dependence on imported oil and in Canada,
where less than 10 percent of oil consumption is imported,

In the

United Kingdom, appreciation of the pound earlier in the year and rising
real wages served to weaken non-oil exports and led to a significant
increase in imports, while a decline in auto exports to the United
States was a major item in the lower Canadian surplus.

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted)

1978
1977
Canada:

1978

1979

Q4

1979
Q1

Q2

1.6 -0.7
1.4 -1.2

Q3

Q4

1.3
2.3

n.a.
n.a.

Jul.
*

Aug.
*

1979
Sept. Oct.

GNP
IP

2.4
4.0

n.a.
n.a.

0.7
2.6

GDP
IP

3.0
2.0

n.a.
n.a.

1.9 -0.2
1.8
0.0

0.5
0.5

1.8
4.1

n.a.
n.a.

*

*

*

3.8

0.0

-0.7

2.6
2.6

n.a.
n.a.

0.8
0.8

2.0
3.4

1.1
1.9

n.a.
n.a.

*3

*

3.2 -3.9

GDP
IP

2.0
1.1

n.a.
n.a.

2.9
6.1

1.1 -0.7
1.1 -2.6

1.0
1.1

n.a.
n.a.

3.2 -0.1

GNP
IP

5.4
4.2

n.a.
n.a.

1.6
2.2

1.5
1.8

1.8
2.0

n.a.
n.a.

1.1

2.0
3.8

n.a.
n.a.

3.7 -1.9
5.5
-2.3

n.a.
n.a.

-1.0

-4.0

5.3
5.9

2.3
4.1

*
0.1

-0.8

2.4 -0.2

*

*

2.4 -1.1

Nov.

Dec.

*

-0.4

n.a.

n.
France:

Germany:

Italy:

Japan:

GNP
IP

United Kingdom:

United States:

GDP
IP
GNP
IP

x GNP data are not published on monthly basis.

0.4
-0.3

-0.1 -1.0
-1.1 -0.7
1.4
1.9

0.3
1.0

1.7
2.4

-0.6
-0.2

0.8
0.2

0.4
-0.1

*

*

-1.0

*

*

-2.9

*

1.5

*

*

*

0.8

0.8

0.8

*

n.a.
*

*

*

6.4

3.8 - 0.1

n.a.
*
n.a.
*

n.a.

*

*

*

*

0.9

-1.5

2.6

1.2

Ii

*
1.5

*
1.1

n.a.

-4.0

*

-0.9

-0.9
*
0.5

*
-0.1

*
-0.3

.a.
*

*
0.3

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change, from previous period or as indicated)

1979

1978
1977

1978

Latest 3 Months
from:
Previous
Year
3 Months
(at Ann. Rate) Ago

Latest
Month

Q3

Q4

Q1

Q2

2.5
2.1

1.6
3.3

2.3
4.9

2.6
3.1

2.3
n.a.

9.5
15.2

9.5
14.8

Dec.

2.7
1.9

2.1
2.9

2.2
4.4

2.8
3.8

2.8
1.8

11.8
7.5

11.5
13.4

Dec.
Dec.

0.0
4.3
n.a. -0.6

0.1
0.1

2.1
3.4

1.6
3.3

0.8
n.a.

3.3
3.8

3.0
2.2

3.8
4.4

3.7
4.6

5.5
n.a.

23.9
24.2

17.6
19.1

Dec.
Nov.

0.2 -0.2
-0.6
1.9

2.2
4.1

1.9
3.3

7.1
18.3

5.6
16.0

Jan.
Dec.

1979

Q3

Q4

Canada: CPI
WPI

8.0
7.9

8.9
9.2

France:

9.5
5.6

9.2
4.3

3.9
1.8

2.6
-0.3

Italy: CPI
WPI

18.4
17.4

12.1
8.4

14.8
n.a.

2.4
1.8

Japan: CPI
WPI

8.3
1.9

4.3
-2.5

3.5
7.3

0.8
-1.7

15.8
19.8

8.3
9.1

13.4
12.2

1.7
1.9

1.7
1.7

3.1
2.7

3.7
4.0

2.8
2.9

11.7
12.2

17.3
15.4

Dec.
Dec.

6.5
6.1

7.6
7.8

11.3
12.5

2.4
1.5

2.0
2.3

2.5
3.6

3.4
3.6

2.9
3.4

12.2
14.4

12.7
14.4

Dec.
Dec.

CPI
WPI

Germany: CPI
WPI

United Kingdom: CPI
WPI
United States: CPI
WPI

9.1
n.a.
10.6
13.3

5.7
9.8

Nov.

Dec.
Nov.

TRADE AND CURRENT-ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIESa
(Billions of U.S. dollars; seasonally adjusted)

Q3

Q4

Q1

Q2

Canada: Trade
Current Account

3.1
-4.6

0.6
-1.2

0.7
-1.5

0.6
-1.2

0.6
-1.3

0.8
-1.0

France: Tradeb
Current Account

0.6
3.7

-2.3
2.4

0.2
0.9

0.0
1.3

0.3
0.6

-0.4
0.7

-1.4
0.1

Q4

Oct.

1979
Nov.

Dec.

n.a.
n.a.

0.3
*

0.4
*

n.a.
*

-0.7
*

-0.3
*

1979
Q3

1978
1978

1979
3 .0e
n.a.

-1.2
0.5

-0.2
*

Germany: Trade
Current Accountc

20.6
8.9

13 .0e

n.a.

5.4
0.2

5.6
4.8

4.3
1.4

3.8
-1.1

2.4
-4.2

n.a.
n.a.

0.4
-0.4

0.9
-0.5

n.a.
n.a.

Italy: Trade
Current Accountc

-0.2
6.4

-5.0e
n.a.

-0.8
2.5

0.5
1.7

-0.4
1.1

-0.7
2.1

-1.2
n.a.

n.a.
n.a.

0.0
*

-2.1
*

n.a.
*

Japan: Trade
Current Account

24.6
16.5

2.0
-8.6

6.8
4.5

4.2
1.7

2.6
0.3

1.8
-0.7

-0.9
-3.8

-1.5
-4.2

-0.5
-1.2

-0.7
-1.7

-0.3
-1.3

United Kingdom: Traded
Current Account

-2.9
1.4

-6.9
-5.1

-0.8
0.6

-0.2
1.2

-3.2
-2.4

-1.4
-1.3

-0.9
-0.5

-1.2
-0.7

-0.9
-0.6

-0.1
0.0

-0.2
0.0

Major Countries, Trade Balance

46.2

3 .8 e

11.4

10.8

4.2

3.7

-1.2

n.a.

-1.4

-1.9

n.a.

United States: Trade
Current Account

-33.8
-13.5

n.a.
n.a.

-7.9
-3.2

-6.0
0.1

-6.1
0.4

-7.7
-1.1

-7.3
0.8

n.a.
n.a.

-2.4
*

-2.0
*

n.a.
*

a
b
c
d
*
e

The current account includes goods, services, and private and official transfers.
French annual data is not seasonally adjusted.
Not seasonally adjusted.
U.K. quarterly data do not reflect revisions in annual totals.
Comparable monthly current account data are not published.
1979 totals estimated.

IV-16

Individual country notes.

In Japan, industrial production record-

ed a substantial increase in October-November compared with the two
previous months, suggesting that fourth quarter real growth may have
slackened very little from the 6-1/2 percent (a.r.) seen earlier in the

year.
The otherwise strong performance of the Japanese economy continues
to be plagued by high rates of inflation that have not been moderated so
far by tighter monetary policy in 1979.

Wholesale prices recorded

another large advance in December (the second-largest monthly increase
in the past five years), and at year-end the WPI was more than 17 percent above its level in December 1978.

Consumer prices have also con-

tinued their recent strong rising trend, although the rate of increase
has been less dramatic; in the three months ending in January consumer
prices rose at about a 7 percent annual rate.

In view of recent large

increases in the WPI, strong upward pressure on consumer prices is expected to continue in the current quarter, a development that could, if
realized, have an adverse impact on spring wage negotiations.
Price factors have dominated recent movements in Japan's external
accounts.

The 1979 current-account registered a deficit of $8.6 billion

due mainly to higher oil import prices that contributed to a decline of
almost 30 percent in Japan's terms-of-trade during the year.
import bill rose $10 billion in 1979.

The oil

The 1979 trade surplus of $2 bil-

lion was $22.6 billion lower than in 1978.
In recently announced policy measures the Ohira government seems
prepared to continue in 1980 a moderate tightening of policy.

The bud-

get for FY1980, which begins April 1, calls for only a 10 percent

Iv-17

nominal increase in general-account expenditures, roughly in line with
expected nominal GNP expansion, while the government's fiscal loan and
investment program will increase by only 8 percent.

Both figures are

slightly below corresponding rates of increase in the FY1979 budget.
The authorities have also forecast a 10 percent rate of growth of M-2
in the current quarter, a one percentage point decline from the fourthquarter rate.
In Germany, industrial production for October-November rose relative to the preceeding two-month period.

This was consistent with

strong GNP growth in the fourth quarter.

However, the rate of unemploy-

ment, after having reached a five year low at 3.6 percent in September
through November, inched up to 3.7 percent in December.
Wholesale prices are currently 10 percent above their year-ago
level.

In December the consumer price index was 5.7 percent over its

year earlier level.
Estimates are that the trade surplus for 1979 declined more than
$9 billion relative to its 1978 level; a change that is accounted for
by the 1979 increase in Germany's oil bill of $10 billion.
Economic activity in Italy in the fourth quarter maintained its
vigorous recovery from mid-year strikes.

Industrial production in Octo-

ber-November averaged 10,5 percent higher than the July-August level.
The major source of strength appears to have been private domestic demand, both in the form of business stockpiling as well as strong consumer demand.

Consumer spending may have been sustained by a growth of

disposable income brought about by last year's contract wage increases
and the more frequent indexation of government workers' salaries.

IV-18

Consumer price inflation in November-December decelerated from its
very high pace of the previous two months, although it still averaged
about 1.5 percent per month.

However, early indications for January

point to an increase of 2.5 to 3 percent, reflecting to a major extent a
sharp rise in fuel prices.

The government recently announced price in-

creases for a wide range of petroleum products as well as increases in
public utility charges.
In November the trade deficit (s.a.) jumped to $2 billion after
averaging $300 million per month in August-October.

Imports rose sub-

stantially in value terms while export values dropped; these movements
may reflect the strength of fourth-quarter activity.
In the United Kingdom, higher industrial production in October and
November and a rise in the volume of retail sales above the level of the
third quarter suggest that the level of real output probably increased
in the final quarter of 1979.

Anticipation of the strike currently under

way against the British Steel Corporation may have boosted fourth-quarter
growth.
Real GDP in France rose by an unexpectedly high 8 percent (s.a.a.r.)
in the third quarter.

However, industrial production for October-Novem-

ber fell relative to the previous two months indicating that this high
rate of GDP growth probably did not continue in the fourth quarter,
On January 1, retail and wholesale price margins were decontrolled
on all goods except fresh food; industrial prices were freed in 1978 and
controls on service prices will be lifted in stages.

However, the gov-

ernment has pledges from large store groups and other sectors to freeze
prices voluntarily for two to three months.

Higher social security

IV- 19
rates were also introduced January 1.

On January 2, the government

reacted to the year-end oil price increase -- the increased oil price
will be passed on immediately and will be reflected in electricity and
gas prices, while the impact on the lowest income recipients will be
offset by a special payment in late February.

About $2 billion will be

made available in credits in 1980 for investments targeted for energy
conservation, exports, and employment creation; the amount is about onequarter of the estimated increase in the French oil bill.
Industrial production in Canada declined in both October and November -- indicating that the economy may have begun to slow during the
fourth quarter.

However, unemployment dropped to 7.1 percent in December

after averaging 7.4 percent during the previous two months.
The merchandise trade balance (s.a.) increased in November to a
surplus of almost $450

million from about $300 million in October.

The

increased surplus reflected a larger decline in imports than in exports,
which may be a consequence of weakening economic activity.

For the first

11 months of 1979, the trade surplus (s.a.) was $2.8 billion compared
with a surplus of $3.3 billion for the comparable period in 1978.

An in-

crease in the Canadian trade deficit with the United States in automotive products in 1979 of more than $1.4 billion compared with 1978 levels
was a major item in the lower overall trade surplus,
On December 28, the Bank of Canada announced a new target range of
5 to 9 percent for the annual growth of M-1 from its average level in
the second quarter of 1979.
a June 1978 base.

The previous range was 6 to 10 percent from

On February 18, parliamentary elections will be held.

IV-20

The December CPI in Sweden was about 10 percent above its yearearlier level, compared with a 6 percent increase over the 12-month
period ending in June.

Most of the acceleration is attributable to in-

creases in energy prices and indirect taxes -- including higher taxes
on energy products.
The Swedish government recently proposed its 1980/81 budget in
which the growth rate of expenditures was halved, due to declines in
subsidies to industries and to a fall in the unemployment rate.

Despite

the reduction in expenditure growth, the new budget deficit will be
equal to 10.5 percent of GNP, which is unchanged from the share of GNP
claimed last year.
The Danish government, confronted by a rate of inflation of about
10 percent during 1979, a persistent current-account deficit, and a foreign debt equal to 20 percent of GNP, proposed a tough incomes policy,
which was quickly compromised.

It now appears that hourly wages in 1980

will rise by about 10 percent, equal to the increase in 1979.

Some

progress was reported in the government's attempt to reduce the weight
of energy prices in the index to which wages are linked.