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Confidential (FR)

Class II FOMC

Part 2

January 31,

1979

CURRENT ECONOMIC AND
FINANCIAL CONDITIONS

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

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and production .................
..................
Personal income and consumer spending.........................
Business investment.....................
..... ....... ..
Residential construction................... .................
............
Government sector activity......... .......
Prices...............
...............................
........
.
Wages, productivity and costs..............................

1
4
6
11
16
18
20

TABLES:
...............
Changes in employment .......................
Selected unemployment rates...................................
.....
.............
...............
Industrial production...
utilization rates.........................
Selected capacity
Personal income.............................................
Retail sales ................. .... . .. ......... .... ... ......
Auto sales................... ..

.....

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

2
2
3
3
5
7
7

Contracts and orders for plant and equipment..................
Survey of plant and equipment expenditures....................
Business inventories......................................
Inventory to sales ratios........................
...........
New private housing activity........................ ......
Recent changes in producer prices...........................
Recent changes in consumer prices..............................
Hourly earnings index..........................................
Major collective bargaining settlements.......................
Productivity and costs........................................

10
12
12
14
19
19
22
22
23

CHARTS:
Inventory to sales ratio..................................
New private housing starts............. ..... w.....

DOMESTIC FINANCIAL DEVELOPMENTS

...

....

13
15

III

Monetary aggregates..........................................
Bank credit.....................................................
Business finance................. .........................
Mortgage market and consumer credit ...........................
Government securities markets.................................

2
8
13
16
23

TABLE OF CONTENTS (cont.)
Section
DOMESTIC FINANCIAL DEVELOPMENTS (cont.)

Page

III

TABLES:
Selected financial market quotations..........................

Monetary aggregates..........................................

Commercial bank credit.........................................

Change in commercial paper outstanding .........................

Change in business credit at finance companies.................
Gross offerings of corporate and foreign securities............
Financing pattern of nonfinancial corporations................
Interest rates and supply of mortgage funds
..
....... .............................
at selected S&Ls...
Secondary home mortgage market activity.........................

14
15
17

........
..........
Consumer instalment credit ..... ............
.......................
Government security offerings ..........

21
24

20
20

CHARTS:
Money market mutual funds............

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

Ratio of liquid assets to total liabilities
at large banks inside and outside
.
New York City .............................................
Ratio of loans to deposits...................................

11
12

Commercial and industrial mortgage activity
at life insurance companies .............................. .

Proportion of low-downpayment automobile
credit contracts at finance companies ........................

Average maturity on new-auto contracts at
commercial banks and finance companies...............,....

INTERNATIONAL DEVELOPMENTS

Borrowing in international capital markets .....................
U.S. international transactions..............................

5
9

Foreign international transactions...........................

Individual country notes.......................................

TABLES:
Borrowing in international capital markets.....................
U.S. merchandise trade...........................

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

U.S. international transactions summary........................

TABLE OF CONTENTS (cont.)

Section
INTERNATIONAL DEVELOPMENTS (cont.)

Page

TABLES:
Consumer and wholesale prices in major
industrial countries...................... ................
Real GNP and industrial production in
major industrial countries..................................
Trade and current account balances of
major industrial countries............................
.....

16
17
18

CHARTS:
Weighted average exchange value of the dollar.................
Real GNP in major industrial countries ...........................

2
15

APPENDIX A:

The Federal Budget for Fiscal Year 1980

APPENDIX B:

New Estimates of the High Employment Budget Surplus Deficit

II - T - 1

January 31, 1979

SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Period

Release
Date

Data

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

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

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

1-12-79
1-12-79
1-12-79
1-12-79
1-12-79
1-12-79

101.9
5.9
3.1
87.3
20.7
66.5

2.8
5.8
3.0
3.4
7.2
2.3

Dec.
Dec.

1-12-79
1-12-79

35.8
5.90

35.8
5.86

35.8
5.77

35.9
5.41

Dec.
Dec.

1-12-79
1-31-79

40.6
169.9

40.7
5.0

40.4
11.4

40.5
5.7

Dec.

1-17-79
1-17-79
1-17-79
1-17-79
1-17-79

150.4
150.5
169.3
87.6
152.9

7.2
5.6
10.0
6.9
5.5

1-24-79
1-24-79
1-24-79

202.9
195.6
219.7

7.1
5.5
9.4

Dec.
Dec.
Dec.

1-11-79
1-11-79
1-11-79

202.1
224.4
226.1

10.2
6.5
-2.1

9.9
10.1
18.9

Dec.

1-18-79

1804.8

12.7

13.8

Dec.
Dec.
Dec.
Dec.

Consumer prices all items (1967=100) Dec.
All items, excluding food & energy Dec.
Food
Dec.

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood

Crude foodstuffs & feedstuffs
Personal income ($ bil.) 2/

7.7

3.2
9.9
10.2
10.2
7.6
7.5
7.6

9.1
8.5
11.7

12.2

(Not at annual rates)

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

Dec.
Dec.
Dec.
Dec.

1-23-79
1-23-79
1-23-79
1-23-79

76.6
24.3
20.3
4.0

-. 1
-3.7
-1.4
-13.9

5.4
2.7
.7
14.1

15.7
13.7
19.5
-8.7

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

Nov.
Nov.
Nov.

1-23-79
1-23-79
1-23-79

1.39
1.48
1.29

1.38
1.49
1.28

1.40
1.51
1.30

1.44
1.57
1.31

1-23-79

.570

.575

.596

.637

3.8
3.1

11.4
6.7

4.7
5.5
.9

1.1
3.4
-8.5

Ratio:

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

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

Dec.
Dec.

1-10-79
1-10-79

68.9
15.1

Auto sales, total (mil. units.) 2/

Dec.
Dec.
Dec.

1-8-79
1-8-79'
1-8-79

11.1
9.2
1.9

Domestic models
Foreign models

Plant & Equipment expen. ($ bil.) 4/
All Industries
1979
Manufacturing
1979
Nonmanufacturing
1979

1-11-79
1-11-79
1-11-79
1-17-79
1-31-79

2,125
137.3

2.1
4.2
-7.0

170.20
76.99
93.20

Housing starts, private (thous.) 2/ Dec.
Leading indicators (1967=100)
Dec.

1.0
.8

11.2
13.8
9.1
-1.4
-.5

1/ Actual data used in lieu of per cent changes for earlier periods.
2/ At annual rate.
Excludes mail order houses.
4/ Planned-Commerce January 1979 Survey.

2.4
-. 6

-3.6
1.4

II - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS
Economic activity advanced at a brisk pace late in

1978.

Employment rose appreciably further in December, industrial production
continued upward, and retail sales closed out the year with three consecutive months of strong gains.

Housing starts held at the high level

that had been sustained since the spring.

Capital spending continued

strong, but evidence of caution was apparent in longer-term spending
plans.

Inflationary pressures remain intense despite two months of some

relief at retail due to temporary factors.

Employment and Production
Employment continued upward in December following several months
of exceptionally strong hiring gains.

The labor force also expanded

rapidly, however, and the umemployment rate edged up to 5.9 per cent-remaining in the range that has prevailed since the spring.

Jobless

rates for most groups of workers were little changed from November.

Over

the year, adult full-time workers generally experienced sizable declines
in unemployment, while the rates for youth fell only slightly.
Nonfarm payroll employment increased 250,000 in December, the
third consecutive month of large rise.

Labor demand remained especially

strong in the goods-producing sector; manufacturers added 125,000 workers
to their payrolls with increases again concentrated among producers of
durable goods.
construction.

Outside of manufacturing, a sizable gain occurred in

II - 2
CHANGES IN EMPLOYMENT 1/
(Thousands of jobs; based on seasonally adjusted data)
1978
1977

QIII

1978

QIV

Nov.

- - - Average monthly changes - - 296
56
369
447
62
-10
146
164
53
19
108
104
8
-29
38
60
38
7
38
27
65
45
47
65
77
71
79
130
16
-44
15
32

Dec.

250
124
81
43
45
-10
48
23

Nonfarm payroll employment 2/
Manufacturing
Durable
Nondurable
Construction
Trade
Services and finance
State and local government

284
66
50
16
30
79
82
28

Private nonfarm production workers
Manufacturing production workers

215
52

220
46

69
-20

290
131

397
148

184
127

Total employment 3/
Nonagricultural

342
336

275
268

123
129

282
288

510
609

104
-8

1/
2/
3/

Changes are from final month of preceding period to final month of period
indicated.
Survey of establishments.
Not strike adjusted.
Survey of households.
SELECTED UNEMPLOYMENT RATES
(Per cent; based on seasonally adjusted data)
1973
Annual average

QII

4.9

6.2

6.0

14.5
7.8
2.5
4.0

16.9
10.2
3.5
5.0

16.1
9.5
3.3
5.1

4.3
8.9

5.4
12.4

Fulltime workers

4.3

White collar
Blue collar'
Craft and kindred
Operatives, ex. transport

2.9
5.3
3.7
6.1

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

oher

1978
QIII
QIV

Nov.

Dec.

5.8

5.9

16.1
9.4
3.3
5.2

16.3
9.0
3.2
4.9

16.2
9.0
3.1
4.9

16.5
9.3
3.2
5.0

5.2
12.1

5.2
11.7

5.1
11.5

5.0
11.7

5.2
11.5

5.7

5.5

5.2

5.3

3.6
7.2
5.1
8.3

3.6
6.7
4.4
8.2

3.6
6.8
4.4
8.4

3.3
6.7
4.5
7.6

3.2
6.4
4.0
7.5

3.5
6.8
4.7
7.7

II - 3

INDUSTRIAL PRODUCTION
(Percentage change from preceding period, seasonally adjusted)

1967 Proportion

1978
III

Nov.

Dec.

100.0

0.2

3.2

2.1

1.7

60.7

0.2

2.5

1.7

1.3

Final Products
Consumer Goods
Durable
Automotive Prod.
Home Goods
Nondurable
Equipment
Business Equipment

47.8
27.7
7.9
2.8
5.1
19.8
20.1
12.6

-0.2
-1.0
-2.7
-5.5
-0.9
-0.2
1.0
0.8

2.9
2.4
6.1
9.7
3.7
0.7
3.9
3.7

1.7
0.8
-0.3
0.3
1.1
3.0
2.9

1.2
0.9
1.0
3.6
-0.7
1.0
1.5
1.8

Intermediate Products
Construction Supplies
Business Supplies

12.9
6.4
6.5

1.7
1.4
2.1

1.1
1.1
1.0

2.1
2.9
1.4

1.9
2.1
1.6

0.7
0.7
0.7

0.8
0.9
0.7

39.3
20.4
10.5
8.5

0.2
0.1
1.9
-2.3

4.2
4.4
3.3
5.4

2.5
4.4
1.2

2.3
2.9
1.8
1.3

0.6
0.6
0.7
0.4

0.5
0.8
0.2
0.5

Total
Products

Materials
Durable
Nondurable
Energy

.6
.6
.5
.5
.4
.1
1.8 -1.7
-0.6
1.4
0.6
0.5
0.6
0.8
0.6
0.8

SELECTED CAPACITY UTILIZATION RATES
(Per cent, seasonally adjusted)
19731974
High
Manufacturing
Primary Processing
Advanced Processing
Materials
Durable Goods Materials
Basic Iron & Steel
Nondurable Goods Materials
Energy Materials
Major Materials

19481977
High

1977
Dec.

Nov.1/

Dec.2/

88.0
93.6
85.4

91.7
94.4
91.8

83.0
84.5
82.2

85.7
88.5
84.2

85.9
88.6
84.5

2.9
4.1
2.3

93.1
92.5
105.2

93.1
93.1
105.2

81.9
80.1
77.4

87.4
87.1
92.8

87.6
87.6
n.a.

5.7
7.5.,
15.4

94.6
94.6

94.6
96.1

85.8
81.4

88.3
86.4

88.2
86.6

2.4
5.2

95.9

84.0

89.1

5.1

1/ Preliminary
2/ Estimated
3/ November 1978 less December 1977.

1978

Dec. 78
less
Dec. 77

II - 4
Industrial production rose 0.6 per cent in December, about in
line with the average monthly increase for 1978 as a whole.

Large
Produc-

advances occurred in output of both materials and final products.
tion of business equipment continued to rise throughout the fourth

quarter, although at a rate of increase less than the unusually strong
pace recorded during the spring and summer.

Consumer goods production

rose at a moderate 3-3/4 per cent annual rate in the fourth quarter-slightly above the third quarter pace.
Capacity utilization in the manufacturing sector reached 85.9
per cent in December, up almost 3 percentage points from a year earlier
and only 2 percentage points below the 1973 high.

The December rate for

materials industries showed somewhat more slack, although rates for
some materials, especially in the durable sector, moved up sharply
over the last year.

Personal Income and Consumer Spending
Total personal income increased appreciably in November and
December.

Reflecting the large recent employment gains, advances in pri-

vate wage and salary disbursements continued to be substantial.

Additionally,

farm income rose rapidly in December because of Federal price-target
deficiency payments to grain farmers.

Real personal income rose at a

4-1/2 per cent annual rate in the final quarter of 1978--the largest
increase in a year.

II - 5
PERSONAL INCOME
(Based on seasonally adjusted annual rate data)

1978
1977

1978

QIII

QIV

Nov.

Dec.

- - Average monthly change, in billions of dollars -

$13.5
12.3
1.2

Total personal income
Nonagricultural income
Agricultural income

$16.3
15.8
.5

$16.3
16.0
.4

Wage and salary disbursements
Private
Manufacturing

8.3
7.0
2.7

11.0
9.8
3.1

7.2
6.4
1.8

Other income
Transfer payments

5.7
1.3

6.1
1.5

9.5
3.6

- -

Total personal income
Current dollars
Constant dollars 2/

$20.0
17.5
2.5

$17.6
16.3
1.2

12.9
11.0
4.7

11.7
10.4
5.7

9.6
8.7
3.2

6.2
1.7

9.7
.9

7.7
1.1

Percentage change, compound annual

11.4

4.4

$18.9
13.7
5.2

rates 1/ - -

12.1
2.9

12.2
3.3

13.2
4.5

11.9
5.3

12.7
5.5

12.5

8.7
.1

13.3
4.5

12.3
5.7

10.0
2.9

Wage and salary disbursements

Current dollars
Constant dollars 2/

11.0
4.1

1/ Monthly percentage changes at annual rates, not compounded; 1977 and 1978 percentage
changes from QIV to QIV.
2/ Deflated by the CPI for all urban consumers, seasonally adjusted.

II - 6
Consumer spending also increased strongly throughout the final
quarter of 1978.

Retail sales excluding autos and mainly nonconsumer

items rose 0.8 per cent in December following a 1,9 per cent increase in

November; for the fourth quarter as a whole, sales in this grouping
advanced at a 3-1/2 per cent rate.

Purchases at general merchandise stores

increased about 1-1/2 per cent in December, as did sales at furniture and
appliance stores.

However, apparel and food sales declined following

large increases earlier in the quarter,
Sales of domestic autos were at a 9.2 million annual rate in
both December and the first twenty days of January, up 350,000, annual
rate, from November and at about the same rate as over the July-October
period.

By size class, only sales of intermediate-sized cars were

somewhat reduced from their pace over most of 1978.

Imported units sold

at a 1.9 million unit rate in December, slightly lower than in November
but about the same as over the last two years.

During the fourth quarter,

foreign units accounted for 18 per cent of total sales, slightly lower
than a year earlier.
Business Investment
Near-term business investment spending commitments remained at
a high level in the fourth quarter, although there was some weakness in
recent orders and contracts following strong increases this past fall.
New orders for nondefense capital goods fell about 9 per cent over the
final two months of the year; even so, these bookings in the fourth
quarter as a whole were 11.4 per cent above the third quarter level.

II - 7
RETAIL SALES
Percentage change from
previous period;
onseasonally adjusted data)
based

QIII

Nov.

Dec.

4.0

1.6

1.2

1.0

(Real) 1/

1978
Oct.

2.0

Total sales

QIV

1.9

Total, less auto and
nonconsumption items

2.1

3.6

1.9

GAF 2/

2.1

3.1

-.4

2.7

Durable
Auto
Furniture & appliances

2.8
.8
2.8

6.2
5.8
2.7

3.4
4.2
-.2

.5
-.9
.2

2.9
3.4
1.4

Nondurable
Apparel
Food
General merchandise
Gasoline

1.5
4.6
1.1
.9
-.1

2.9
3.4
2.6
3.2
4.7

.6
-.8
1.6
-.3
.7

1.5
4.2
.8
3.1
1.8

.1
-2.0
-.4
1.6
1.1

1/ Deflated by all commodities SA consumer price index.
2/ General merchandise, apparel, and furniture and appliance stores.
AUTO SALES
(Seasonally adjusted annual rates; millions of units)

QIV

1978
Oct.

Nov.

Dec.

11.2

11.1

11.2

10.9

11.1

Imports

2.0

2.1

1.9

Domestic

9.2

9.1

9.2

8.8

9.2

QIII
Total

- 8

CONTRACTS AND ORDERS FOR PLANT AND EQUIPMENT 1/
(Percentage change from preceding comparable period, seasonally adjusted)

1978

QII

QIII

QIV

Oct.

Nov.

Dec.

11.8

-4.8

11.6

n.a.

13.5

-8.4

n.a.

5.6

3.5

5.3

11.6

10.3

-7.4

-1.4

50.6

-40.2

57.9

n.a.

33.1

-13.6

n.a.

9.7

-5.9

8.8

n.a.

12.1

-9.5

n.a.

3.5

2.4

2.9

n.a.

9.3

-8.7

n.a.

48.8

-42.3

54.1

n.a.

30.3

-13.4

n.a.

Current dollars
Total
Nondefense capital goods orders
Construction contracts 2/
1972 dollars
Total
Nondefense capital goods orders
Construction contracts 2/

The Commerce Department creates this series by adding new orders for nondefense
capital goods to the seasonally adjusted sum of new contracts awarded for commercial
and industrial buildings and for private nonbuilding projects (e.g., electrical
utilities, pipelines, etc.).
FRB staff estimate. Derived by subtracting new orders for nondefense capital goods
from the published total for contracts and orders.

II - 9
Bookings for machinery, which are indicative of the general trend in the
demand for equipment, rose 6.4 per cent in the fourth quarter and stood
16 per cent above the year-earlier level.

As has been the case throughout

the year, gains in the fourth quarter were particularly strong in the
nonmachinery category of nondefense capital goods orders, which consists
largely of aircraft and ships.
Nonresidential construction contract awards, a series that is
quite volatile from month to month, were about the same in the fourth
quarter as in the third, largely because of the extremely high level in
October.

The total value of contracts awarded in 1978 were about 20

per cent above the value awarded in the preceding year.
Surveys of business spending intentions suggest a slowing of
outlays later this year.

The Commerce Department's annual survey con-

ducted in November and December indicated that business is anticipating
only moderate growth in capital spending in 1979.

These survey

results,

which are generally in line with earlier private readings, show business
planning to increase capital outlays by 11.2 per cent in 1979, with considerable strength evident in the plans of the manufacturing sector.
Respondents expect capital goods prices to rise about 8 per cent in 1979,
thus implying only 3 per cent growth in real terms for the year.

This

survey has been a fairly reliable indicator of future capital spending
over its nine year history; in each of the last three years it has underestimated the eventual nominal increase by about 1 to 1-1/2 percentage

points.

- 10

SURVEY OF PLANT AND EQUIPMENT EXPENDITURES
(Percentage change from prior year)

Actual 1/

Planned for 1979

1978

McGraw-Hill

Commerce

12.7

9.9

11.2

Manufacturing

12.4

10.3

13.8

Durables

14.3

12.2

16.2

Nondurables

10.8

8.6

11.7

13.0

9.5

9.1

7.8

8.0

9.7

Transportation

15.0

13.6

14.9

Utilities

13.0

7.1

11.6

Communications

16.8

10.0

4.0

Commercial and other

10.7

11.0

7.9

All Business

Nonmanufacturing

Mining

November Commerce survey, based on actual expenditures for the first three
quarters of the year and planned outlays for the fourth quarter.

II - 11
Inventory investment in book value terms was sizable in November
as manufacturing and trade stocks increased at an annual rate of $49.2
billion.

This compares with a $31-1/2 billion rise in October and was

the largest gain since April.

The November rise in stocks was accompanied

by only a moderate increase in sales, and the ratio of inventory book
values to sales for total manufacturing and trade edged up.

Nonetheless,

the overall stock-sales ratio in book value terms remained low on an
historical basis.
Accumulation at manufacturers--$21.5 billion, annual rate-accounted for almost half of the total November increase and was the
largest rise since June.

The increase in trade inventories was of the

same order of magnitude as in October.

Most of this rise was at

retailers, particularly at motor vehicle dealers where unit stocks
were also up in November but leveled off in December.
Inventory data had indicated the emergence during the fall
of excess stocks relative to sales at retailers of general merchandise.
However, strong pre-Christmas sales and some adjustments in production
have worked toward correcting this imbalance; as a result, the inventory
to sales ratio for general merchandisers declined in November for the
first time since February.
Residential Construction
Overall housing activity remained surprisingly strong late in
1978.

Total private housing starts were at a 2.13 million unit annual

rate in December, down only marginally from the November pace.

Starts

II - 12

BUSINESS INVENTORIES
(Annual rate of change in seasonally
adjusted book values; billions of dollars)

QII

1977
QIII

QIV

28.3

25.2

Manufacturing
Durable
Nondurable

15.7
7.8
7.9

Trade, total
Wholesale
Retail
Auto

12.6
2.6
10.0
2.2

Manufacturing and trade

1/
2/

1978
QIII

QII

17.8

44.2

44.3

31.3

10.2
7.7
2.4

2.8
3.8
-1.0

16.6
13.2
3.4

22.8
15.9
6.9

18.0
14.0
4.1

8.1
7.3
.8

15.0
4.7
10.3
1.5

14.9
7.5
7.4
2.9

27.6
19.5
8.1
.9

21.5
11.8
9.8
.2

13.3
4.8
8.5
-. 2

23.6
15.9
7.6
4.9

Oct. 1/
31.6

Nov. 2/
49.2
21.5
18.1
3.4
27.7
8.1
19.5
8.4

Revised.
Preliminary.

INVENTORY TO SALES RATIOS

1978

QII

1977
QIII

QIV

1.46

1.48

1.44

Manufacturing
Durable
Nondurable

1.60
1.96
1.22

1.61
1.96
1.22

Trade, total
Wholesale
Retail

1.32
1.21
1.43

1.35
1.24
1.44

Manufacturing and trade

1/ Revised.
2/ Preliminary.

Oct. 1/

Nov. 2/

QII

QIII

1.46

1.42

1.43

1.38

1.39

1.56
1.90
1.18

1.56
1.90
1.17

1.52
1.86
1.15

1.54
1.87
1.16

1.49
1.80
1.13

1.48
1.79
1.12

1.33
1.23
1.42

1.36
1.27
1.45

1.31
1.20
1.42

1.32
1.20
1.43

1.28
1.16
1.40

1.29
1.17
1.41

II - 13

INVENTORY TO SALES RATIOI/
(Book value basis)
1.8
Total Manufacturing and Trade

1.5

I I I

1/ Last period plotted is November, 1978.

1 1.2

- 14

NEW PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)

1978
Oct2/

Nov2/

Dec 1 /

1.71
2.13

1.72
2.11

1.72
2.16

1.68
2.13

1.05
1.45

1.13
1.52

1.13
1.46

1.11
1.56

1.16
1.53

.84
3.81

.79
3.97'

n.a.
n.a.

.98
4.29

.81
4.35

n.a.
n.a.

.61
.64

.59
.62

.58
.61

.59
.65

.61
.60

.52
.59

.26

.31

.30

.31

QII

QIII

QIV

1.72
2.11

1.64
2.07

Permits
Starts

1.11
1.47

Sales
New homes
Existing homes

Total
Permits
Starts
Single-family

Multifamily
Permits
Starts
Mobile home shipments
1/
2/

Preliminary.
Revised.

II - 15

NEW PRIVATE HOUSING STARTS
(Seasonally adjusted annual rates)
Millions of units
I l llil
l llll l l il
2.4

2.0

TOTAL

- 1.6

1.2

SINGLE -FAMILY

SMULTIFAMILY

111
1974

1975

1976

0
1977

1978.

16 -

have now fluctuated in a narrow band slightly above 2 million units for
10 months.
Much of the strength in the housing sector over the last few
months has been in the single-family market where--despite a fractional
decline in December--the average rate of starts in November and December
was close to the recent series record set in 1977 Q4.

Moreover, single-

family home sales also remained strong in late 1978.

Sales of new homes

in November were down from the advanced October rate but about equal to
the strong selling pace earlier in 1978.

Moreover, sales of existing

homes continued their record-setting pace by rising more than 1 per cent
in November.

However, while sales have remained generally brisk, the

median number of months on the market for new homes sold rose to an
average of about 4-1/2 months in October and November--up 1/2 month from
the rate experienced during most of the first nine months of 1978.
In the multifamily sector, starts declined for the second
successive month in December.

This recent weakness followed a surge in

September and October that was apparently related to the large number of
units started around the end of the fiscal year under HUD's Section 8
rental assistance program.
Government Sector Activity
The Federal deficit, on a National Income and Product Accounts
basis, is estimated to have been at a $20 billion annual rate in the
fourth quarter of 1978, down from a $23 billion deficit in the third
quarter of the year.

In the fourth quarter, a sizable increase in

II - 17
receipts more than offset a sharp rise in outlays.

Purchases of goods

and services rose sharply, mainly because of an increase in Commodity
Credit Corporation nonrecourse loans and the 5.5 per cent Federal pay
raise in October.
quarter of 1978.

Outlays for interest also rose sharply in the final
The gain in receipts--20 per cent at an annual rate--

reflected the strong growth in income.
The Administration now estimates spending and receipts in
fiscal year 1979 at $493 billion and $456 billion (on a Unified Budget
basis), respectively.

For fiscal year 1980, beginning October 1, 1979,

the Administration has proposed a budget with outlays of $532 billion,
receipts of $503 billion, and a deficit of $29 billion.

(A detailed

description of the President's budget is presented in Appendix A.)
Recent data continue to indicate a moderation in growth of total
State and local government spending.

State and local government employ-

ment increased by about 25,000 in December, following a larger gain in
November.

Nevertheless, these recent gains did not make up for the

earlier declines in employment that occurred in the July through October
period.

The net employment loss is evidently attributable to cutbacks

in CETA hirings, which appear to reflect uncertainty among local public
sponsors about future federal funding of the program.

The value of new

construction put-in-place declined by $1.5 billion in November, but
remains at a high level following very strong increases last spring
and summer; in real terms, these expenditures were 11 per cent above yearearlier levels.

- 18

Prices
Inflation continued at a rapid pace in the final months of
1978. The gross business product fixed-weight price index--a broad
measure of prices--rose at an 8-1/4 per cent annual rate in the fourth
quarter, and producer prices rose at a 10-1/4 per cent rate.

Increases

in the consumer price index did slow a bit during the last two months of
1978, but this was mainly a result of factors that appear to be temporary-the November moderation in the advance of food prices and the December
decline in California property taxes resulting from Proposition 13.
Increases in retail food prices accelerated again in December.
Meat prices rose considerably in both months, but in November the rise
was offset partially by declines in prices of fruits and vegetables,
Recent developments in agricultural commodity markets indicate a sharp
increase in farm prices in January associated in part with adverse weather
conditions in the Midwest, Texas, and California.
Energy prices accelerated in the fourth quarter; electricity
rates declined on average, but this was more than offset by a faster rise
in prices of gasoline and other petroleum-based fuels.

Increases in

retail gasoline prices averaged about 1-3/4 per cent per month in
November and December; since last June gasoline prices have risen at a
17-1/2 per cent annual rate,
Outside the food and energy areas, the December consumer price
rise was at about the same rate as earlier in the year, if an adjustment
is made for the exceptional cut in property taxes in California resulting

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at compound annual rates; based
on seasonally adjusted data)1/
Relative
importance
Dec. 1977

1978
1977

1978

QIII

QIV

Dec.

Finished goods
Consumer foods
Consumer nonfoods
Capital equipment

41.2
10.3
18.7
12.2

6.6
6.6
6.1
7.2

9.1
11.9
8.3
8.0

10.5
17.9
8.2
7.9

5.0
-1.0
7.6
6.4

10.3
13.7
9.1
9.9

10.2
11.2
10.2
9.4

Materials:
Intermediate 2/
Construction
Crude nonfood
Crude food

45.5
8.3
4.6
6.3

6.4
8.3
6.8
1.4

8.2
10.8
15.7
18.3

7.9
11.9
13.9
34.1

6.7
8.5
12.2
-9.4

10.4
11.1
23.1
20.3

6.5
3.6
15.8
-2.1

1/ Changes are from final month of preceding period to final month of period
indicated.
Monthly changes are not compounded.
2/
Excludes intermediate materials for food manufacturing and manufactured

animal feeds.
RECENT CHANGES IN CONSUMER PRICES
(Percentage change at compound annual rates; based
on seasonally adjusted data) 1/
Relative

importanq
Dec. 77'

1978
1977

1978

QIII

QIV

Dec.

100.0

6.8

9.0

10.4

7.8

7.9

7.1

Food
Commodities (nonfood)

17.7
41.6

8.0
4.9

11.8
7.7

18.4
6.6

3.0
7.8

7.8
10.1

9.4
10.7

Services

40.7

7.9

9.3

10.4

10.3

5.7

2.2

All items less food
and energy 3/
Gas and electricity

73.7
3.4

6.4
8.7

8.5
7.9

9.0
17.0

8.3
4.5

7.7
-5.1

5.5
2.0

Gasoline
Homeownership

4.2
22.8

4.9
9.2

8.5
12.4

-. 2
13.3

14.0
14.7

21.7
8.8

22.3
3.0

All items

Memoranda:

1/
2/
3/

Changes are from final month of preceding period to final month of period
Monthly changes are not compounded.
indicated.
Based on new index for all urban consumers.
Energy items excluded: gasoline and motor oil, fuel oil and coal,
electricity.

gas and

II
from Proposition 13.

- 20

This special factor--which reduced the rise in

the total CPI for December from 0.8 per cent to 0.6 per cent--contributed
to a marked slowing in the increases in the cost of homeownership.
The price relief due to this factor is a one-time occurrence, and the
resumption of substantial increases in homeownership costs seem
likely as recent increases in mortgage rates show up in the CPI.

Move-

ments in the mortgage interest rate component of the CPI generally
reflect changes in mortgage commitment rates with about a three to
four month lag.
From December 1977 to December 1978 consumer prices rose 9 per
cent, about 2-1/4 percentage points more than during 1977.

Homeownership

prices rose about 12-1/2 per cent--over 3 percentage points more than in
1977--and contributed about 3/4 percentage point to the acceleration in
the overall CPI increase.

The other major contributors to the CPI

acceleration in 1978 were food and used cars, which were responsible for
nearly 3/4 and 1/2 percentage points of the 1978 acceleration, respectively.
Excluding these 3 components, the acceleration in the CPI increase was
still about 1/2 percentage point.
Wages, Productivity and Costs
Wages, as measured by the average hourly earnings index, rose
almost 8 per cent in the fourth quarter--slightly slower than the rate
over the year as whole.

Manufacturing wages continued to increase at

about the 8-1/4 per cent rate recorded in the first nine months of this
year.

Major collective bargaining settlements in the fourth quarter

- 21

resulted in first year wage-rate adjustments averaging 7-3/4 per cent,
similar to those negotiated earlier in the year.

In January, the Oil,

Atomic and Chemical Workers Union reached a tentative settlement in
their wage negotiations with Gulf Oil which appears to comply with the
Administration's pay standard.

The two-year contract calls for increases

in total wages and benefits of 8 per cent in the first year and 5 per
cent in the second year; the contract also includes a wage reopening in
the second year but stipulates that further adjustments must be consistent
with the pay standard.
Labor costs continued to rise at a rapid rate in the fourth
quarter.

Hourly compensation, which includes both wages and benefits,

increased about 9 per cent in the final quarter of 1978 and about 9-3/4
per cent over the four quarters of the year.

The rapid growth of output

in the fourth quarter was accompanied by a productivity gain of 2-1/4 per
cent in the nonfarm business sector; this was the same pace as in the
third quarter and a marked improvement from the productivity decline
recorded in the first half of the year.

Reflecting these movements in

compensation and productivity, unit labor costs growth in the fourth
quarter slowed somewhat; nevertheless, the increase over the four
quarters of 1978 was 9 per cent--the largest four quarters advance in
these costs since early 1975.

- 22

HOURLY EARNINGS INDEX
(Percentage change at compound annual rates; based on seasonally adjusted data) l/

1978

1977 2/

Total private nonfarm

QII

QIII

QIV

7.5

Manufacturing
Contract construction
Transportation and public
utilities
Total trade
Services
1/

1978

8.2

9.2

8.4

7.3

7.9

8.3
4.0

8.2
7.6

8.6
8.1

7.7
10.5

8.1
6.6

8.3
5.5

9.1
7.4
7.1

6.8
9.3
7.5

8.2
12.3
9.6

7.9
7.9
6.5

4.5
8.8
5.5

6.5
8.3
8.5

Excludes the effect of interindustry shifts in employment and fluctuations in
overtime pay in manufacturing.
Changes are from final quarter of preceding period to final quarter of period
indicated.

MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Percentage change at annual rates)

1975

Average adjustment
1976
1977
1978

Wage-rate settlements (1,000 or more workers)
First year adjustments
Average over life of contracts 1/

10.2
7.8

8.4
6.4

7.8
5.8

7.7
6.5

Wage and benefit settlements (5,000 or more
workers)
First year adjustments
Average over life of contracts 1/

11.4
8.1

8.5
6.6

9.6
6.2

8.4
6.5

8.7
2.8
3.7
2.2

8.1
3.2
3.2
1.6

8.0
3.0
3.2
1.7

8.0
2.0
3.7
2.3

Effective wage-rate adjustments (1,000 or
more workers)
Current settlements
Prior settlements
Escalator provisions
1/

Excluding cost-of-living adjustments.

II - 23

PRODUCTIVITY AND COSTS
(Percentage change from preceding period at compound annual rates;
based on seasonally adjusted data) 1/

1977

1978

1.5
1.3
2.9
2.6
3.5

.5
.8
3.5
3.1
4.2

-4.5
-3.1
-5.1
-6.8
-2.6

7.5
7.6
9.0
9.8
7.2

9.8
9.8
9.6
9.4
9.5

5.8
6.3
5.9
7.0
3.6

9.2
8.9
5.9
6.1
5.1

1978
QII

QIII

QIV

1.2
1.7
8.3
11.3
3.9

3.5
2.3
10.8
10.2
11.8

2.1
2.3
.8
-1.2
4.2

12.1
12.2
11.6
10.4
13.6

8.1
8.2
7.4
7.5
7.2

10.4
9.6
10.6
10.4
9.7

8.7
9.1
9.0
9.2
7.6

17.4
15.7
17.7
18.5
16.6

6.8
6.4
-.8
-3.4
3.2

6.7
7.1
-.2
.2
-1.9

6.5
6.7
8.1
10.5
3.3

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

Changes are from final quarter of preceding period to final quarter of period
indicated.

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest data
Indicator
Period

Monetary and credit aggregates1/
Total reserves
Nonborrowed reserves
Money supply
M1
Ml+
M2
M3
Time and savings deposits (less CDs)
CDsa /
Thrift deposits (S&Ls + MSBs
+ Credit Unions)
Bank credit (end of month)

Level

Month
ago

Net Change from:
Year
Three
months ago
ago

Per cent at annual rates

$ billions
January
January

41.4pe
40.5pe

-4.7
-4.3

-0.8
3.5

4.9
4.0

January
January
January
January
January
January

361.3pe
582.6pe
87 2 .6 pe
1503.9pe
511.4pe
100.7pe

0.7
-3.3
0.8
4.2
1.2
3.7

-0.8
-4.2
2.4
5.4
4.7
12.5

5.7
4.0
6.9
8.5
7.8
24.4

631.5pe
971.1

9.4
1.1

9.7
5.9

10.7
10.9

January
December

Latest

Net Change from:
Three
Month
months Year
ago
ago
ago

Period

data
Per cent
or index

1/24/79

10.05

.80

1.27

3.28

1/24/79

9.38

.08

1.71

2.92

1/24/79
1/19/79
1/25/79
1/23/79

10.19
9.54
6.30
10.73

-. 33
-. 31
-.20

1.10
-.09
-.03

3.40
.86
.60
1.51

1/24/79
1/29/79

5.30
56.85

-.20
3.23

-. 03
4.20

-. 12
7.40

Indicator

Market yields and stock prices
wk. endg.
Federal funds

Treasury bill (90 day)

Commercial paper (90-119 day) "
New utility issue Aaa
"
Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)
Dividend price ratio (common
stocks)
wk endg.
NYSE index (12/31/65=50)
end of day

Net Change or Gross Offerings
Latest Year
Year to Date
Period
Data
ago
1978
1977
Credit demands
/
Business loans at commercial banksConsumer instalment credit outstanding//
Mortgage debt outstanding (major holders)-Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings)
Federally sponsored agcy. (net borrowing)
U.S. Treasury (net cash borrowing)

December
December
November
December
December
December
January

-0.1

3.7e
10.2
1.2e
3.6e
2.1e
3.7

1.4
3.6
9.4
1.5
3.6
0.8
6.0

Seasonally adjusted.
$ billions, not at annual rates
Includes comm'l banks, S&Ls, MSBs, life ins. cos, FNMA, and GNMA.
e - Estimated
pe- Partially estimated.
2/
3/

26.5
43.9
89.4
20.1e
47.9e

23.4
3.7

21.7
35.0e
80.0
24.2
46.7
6.8
6.0

III - 1

DOMESTIC FINANCIAL DEVELOPMENTS
Credit flows to the private nonfinancial sectors of the economy
appear to have been smaller in December and January than during the
previous two-month period.

During December, more moderate growth in

short- and intermediate-term business credit reflected flatness in business
loans at commercial banks combined with continued sizable increases in
nonfinancial commercial paper and finance company loans. In January, bank
business loans seem to have resumed growing, but the issuance of nonfinancial commercial paper has slowed. Longer-term business borrowing diminished
in December and January, although the relatively light volume of gross
bond and stock financing was supplemented by apparently heavy takedowns
of mortgage loans from insurance companies and commercial banks. Among
households, consumer instalment credit and mortgage borrowing appear to
have weakened somewhat in December. In the public sector, gross borrowing
by State and local governments increased in the final month of 1978 but
declined in January.

In contrast, net offerings of Treasury and sponsored

agency securities were lower in December than in the previous month,
before expanding early in 1979.
Both M-1 and M-2 grew slowly in December and January. The modest
expansion in the broader aggregate reflected further substantial declines
in savings deposits together with a moderate expansion in time deposits.
Although sales of money market certificates (MMCs) have remained quite
brisk, total deposits subject to interest rate ceilings declined in December
for the second month in a row.

Deposit growth at thrift institutions in

December and January is estimated to have been somewhat less than in the
preceding several months.

III -

Most money market interest rates have declined 25 to 75 basis
points since the last FOMC meeting.

Interest rates moved higher following

the December meeting as a further rise in the System's Federal funds rate
objective into the 10 per cent area became apparent; these increases subsequently were more than reversed for most instruments, due in part to
the persistent weakness in the major monetary aggregates and the relative
stability in the foreign exchange value of the dollar. Yields on shorter-term
Treasury bills are slightly above their levels at the December meeting, however, reflecting sales of bills by the System, an increase in Treasury issuance of 3-month bills, and smaller purchases of bills in January by foreign
central banks.

Longer-term Treasury and municipal bond yields meanwhile

have declined about 10 to 25 basis points, but primary mortgage rates
have edged higher.

Stock prices fell slightly in late December, and the

climbed 7 to 10 per cent in January.
Monetary Aggregates
M-l expanded at a 1-3/4 per cent pace in December, and it has
remained about unchanged on average since year end. Given moderate growth
in October and sharp contraction during November, the average level of M-1
was about the same in January as four months earlier. On a quarterly
average basis, M-1 grew at only a 4-1/2 per cent annual rate in the final
three months of 1978, down from 7-1/2 per cent in the third quarter and
its slowest pace in more than two years. The cumulative impact of recent
increases in market interest rates probably is responsible for much of
the reduction in M-1 growth.

In addition, a shift of consumer deposits

at commercial banks from demand accounts to savings accounts eligible

III - 3
SELECTED FINANCIAL MARKET QUOTATIONS
(per cent)
1978 1/
High

Low

Oct.
31
31

1978-1979 2/
FOMC
FOMC
FOMC
FOMC
Nov.
Dec.
21
19
21
19

10.25

6.58

9.29

9.68

9.30
9.51
9.62

6.16
6.45
6.55

8.75
9.23
9.13

Commercial paper
1-month
3-month

10.56
10.52

6.70
6.68

Large negotiable CDs 4/
3-month
6-month

10.96
11.52

Bank prime rate

Change from:
Jan.
30
30

Oct.
31
31

Dec.
FOMC
FOMC

9.75

10.05 3

+.76

+.30

8.83
9.08
9.09

9.21
9.61
9.61

9.27
9.35
9.34

+.52
+.12
+.21

+.06
-.26
-.27

9.13
9.40

9.79
10.15

10.22
10.42

9.75
10.02

+.62
+.62

-.47
-.40

6.77
6
.97p

10.38
11.25

10.54
11.01

10.90
11.50

10.18
10.61

-.20
-.64

-.72
-.89

11.57

7.75

10.25

11.00

11.50

11.75

+1.50

+.25

9.30
9.54

8.61
8.48

9.23
9.24

9.25
9.24

9.29
9.35

9.46 p

+.22

+.11

Municipal
(Bond Buyer) 7/

6.67

5.58

6.21

6.11

6.45

6.30

+.09

-.15

U.S. Treasury
(constant maturity)
3-year
7-year
20-year

9.59
9.22
9.00

7.40
7.72
8.01

9.32
9.00
8.90

8.89
8.76
8.70

9.49
9.15
8.99

9.18
8.96
8.90

-.14
-.04
0

-.31
-.19
-.09

Oct.
31

FOMC
FOMC
Nov.
21

FOMC
FOMC
Dec.
19

Jan.
30

Oct.
31

Dec.
FOMC

792.45
51.67
136.75
694

804.05
52.96
145.69
596

789.85
52.58
146.38
600

851.78
56.60
161.26
629

+59.33
+4.93
+24.51
-65

+61.93
+4.02
+14.88
+29

Short-term rates
Federal funds 1/
Treasury bills
3-month
6-month
1-year

Intermediate- and longterm rates
Corporate
New AAA 5/
Recently offered 6/

Low
8/
Stock prices
Dow-Jones Industrial
N.Y.S.E. Composite
AMEX
Keefe Bank Stock 6/

742.12
48.43
119.73
558

High
8/

907.74
60.38
176.87
694

Daily averages for statement week, except where noted.
One-day quotes except as noted.
Average for first 6 trading days of statement week ending January 31.
Secondary market.
Averages for preceding week.
One-day quotes for preceding Friday.
One-day quotes for preceding Thursday.
Calendar week averages.

III -

MONETARY AGGREGATES 1/
(Seasonally adjusted)-

1978
QIVP Oct.

Nov.

Dec. '77
to
Dec.P Dec. '78

QIII
H1
Major monetary aggregates
1. M-1 (currency plus demand
6.7
-4.6
1.7
4.4
3.7
8.1
7.6
deposits)
2. M-l+ (M-l plus savings
deposits at CBs and
checkable deposits at
4.3
2.4
1.8
-7.1
-2.3
5.9
5.3
thrift institutions)
3. M-2 (M-1 plus time & savings
deposits at CBs, other
4.3
2.1
7.7
7.5
7.0
7.4
8.9
than large CDs)
M-3 (M-2 plus all deposits
4.
8.9
5.2
9.6
6.6
9.7
7.8
10.1
at thrift institutions)
Bank time and savings deposits
11.5
23.7
5.0
7.9
12.5
11.7
9.5
5. Total
6. Other than large negotiable
CDs at weekly reporting banks
(interest bearing component
8.5
9.6
9.1
10.7
2.4
6.9
10.0
of M-2)
0.3
-8.7
-11.3
-1.6
-0.9
1.3
2.1
Savings deposits
7.
0.7
-8.7
-8.6
-2.9
2.5
-0.8
2.1
Individuals 2/
8.
-5.2
16.0
-39.5 -16.3
-2.7
1.3 -15.5
Other 3/
9.
15.5
27.7
10.8
18.1
17.7
11.1
17.3
10.
Time deposits
8.6
8.8
4.7
23.5
13.0
8.5
5.2
Small time 4/
11.
28.9
13.0
67.8
8.1
26.7
32.7
22.7
Large time 4/
12.
13. Time and savings deposits sub3.8
-0.9
-4.2
9.4
4.4
5.2
3.4
ject to rate ceilings (7+11)
Deposits at nonbank thrift institutions 5/
9.5
10.6
13.6
10.1
13.0
8.3
11.6
14. Total
11.5
14.9
12.2
11.5
8.5
12.8
14.5
15. Savings and loan associations
16. Mutual savings banks
4.8
7.1
9.3
11.2
6.9
4.3
6.6
n.a.
n.a.
2.3
n.a.
6.8
13.6
17.4
Credit unions
17.
Average monthly changes, billions of dollars
MEMORANDA:
-4.6
0.3
-0.1
3.8
0.5
0.0
1.5
18. Total U.S. Govt. deposits 6/
4.0
0.8
13.1
2.8
4.2
3.1
4.4
19.
Total large time deposits 7/
1.2
-1.9
3.8
5.1
2.3
0.7
1.1
20. Nondeposit sources of funds 8/
n--nreliminarv. n.a.--not available. e--estimated
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.
Small time deposits are time deposits in denominations less than $100,000. Large
time deposits are time deposits in denominations of $100,000 and above excluding
negotiable CDs at weekly reporting banks.
Growth rates computed from monthly levels based on average of current and preceding
end-of-month data.
Includes Treasury demand deposits at commercial banks and Federal Reserve Banks and
Treasury note balances.
All large time certificates, negotiable and nonnegotiable, at all CBs.
Nondeposit borrowings of commercial banks from nonbank sources include Federal funds
purchased and security RPs plus other liabilities for borrowed money (including borrowings from the Federal Reserve), gross Eurodollar borrowings, and loans sold, less

interbank borrowings.

1979
Jan.e

0.7

-3.3

0.8
4.4
8.5

1.2
-9.3
n.a.
n.a.
9.5
n.a.
n.a.
n.a.
9.4
11.4
4.2
n.a.
-2.8
3.5
n.a.

III -

for automatic transfer services (ATS) is estimated to have reduced M-1
growth by 3 percentage points in both November and December (and the
fourth quarter average by 1 per cent), and additional transfers

limited

M-1 growth in January. Moreover, inflows to newly authorized NOW accounts
in New York State grew sharply in January, further reducing M-1 growth.
Data from the most recent Demand Deposit Ownership Survey
indicate weakness in both business and consumer demand deposits during
the fourth quarter. At large banks, demand deposits held by financial
businesses declined and net inflows to accounts of nonfinancial businesses
slowed sharply.

In the consumer category, strong growth in October was

followed by net outflows after the introduction of ATS on November 1.
Despite the shifting of funds to ATS accounts, net outflows
from savings accounts continued in both December and January as the
spread between Treasury bill rates and Regulation Q ceilings widened to a
record amount.

On average for the fourth quarter, total savings accounts

at commercial banks contracted by 1 per cent at an annual rate, the first
quarterly decline since 1970.

Savings deposit outflows were concentrated

in accounts held by individuals and nonprofit institutions.
M-2 growth decelerated in both December and January, continuing
a trend that began last October.

The fourth quarter slowdown in the rate

of expansion of M-2 was, however, less pronounced than the deceleration
of the narrower monetary aggregates, as inflows of large time deposits
included in this aggregate remained strong and the growth of total smalldenomination time deposits accelerated.

Helping to buoy growth of smaller

time deposits was a $13.3 billion net inflow of MMCs, almost twice the

III - 6

previous quarter's amount.

Other small time deposits maturing in less

than 4 years continued to contract, while accounts maturing in 4 years
or more were essentially unchanged after growing moderately in the previous quarter.
Deposit growth at S&Ls and MSBs declined to 9.5 per cent in
December, its lowest rate since the MMCs were introduced.

The combined

deposit growth for these institutions in January appears to be about the
same as in December, and remains well below the pace recorded in the third
quarter.

Like commercial banks, S&Ls and MSBs have experienced sharp out-

flows from savings accounts. But given the further sharp increase in interest
rates since early fall, nonbank thrift deposit growth would have been substantially lower without MMCs. Over the fourth quarter, net sales of these
certificates totaled $21.5 billion at S&Ls and $6.7 billion at MSBs. At
year end, outstanding MMC balances at S&Ls and MSBs were $40.8 and $12.8
billion, respectively, accounting for more than 9 per cent of total deposits
at the institutions compared to 5-1/4 per cent of small-denomination time
and savings deposits at commercial banks.
The advance in interest rates during the fourth quarter
apparently encouraged the public to economize further on noninterestearning assets and to seek out more actively assets offering market yields.
The combined assets of money market mutual funds, for example, increased
by more than $1 billion to $10.7 billion in December, and posted further
increases of $2.2 billion in the first three weeks of January (see Chart
on page 7).

Offerings of short-term unit investment trusts also reappeared

in the final quarter of 1978.

Sales of these investment companies--

III - 7

MONEY MARKET MUTUAL FUNDS
(monthly)
Billions of $
14

Total Net Assets (end of month)

-12

6
4

LIIL

Per Cent
12

Average Annual Yield (end of month)

1974

L
1975

Latest data shown:

1976

December 1978.

1977

-~-~~~~
1978

1979

III - 8

representing interests in fixed CD pools--have totaled more than
$1.1 billion since early November.1

In addition, noncompetitive tenders

have increased somewhat at recent Treasury bill and note auctions.
Bank Credit
Commercial bank credit expanded at an annual rate of only 1.1
per cent in December, the smallest monthly growth recorded last year.

Fol-

lowing brisk expansion in the preceding two months, total loan growth
decelerated sharply in the final month of 1978 as business loans were about
unchanged, securities loans declined, and real estate loans expanded less
rapidly.

Data for large banks provide some evidence of renewed business

loan expansion in January, with most of the strength attributable to nonNew York City (NYC) banks. This reverses the pattern that characterized
business loans in December: NYC banks recorded strong loan growth, but
this was more than offset by loan declines at large non-NYC and small
banks.
Banks reduced their portfolios of Treasury securities in December
for the fifth consecutive month, while net acquisitions of other securities-mainly State and local issues--remained at about November's reduced pace.
The recent decline in holdings of U.S. Government securities at large banks
has been concentrated in those maturing in over 1 year. As a result, a
downward movement in the ratio of liquid assets to liabilities at these

Several major brokerage houses sponsored 11 unit trust offerings in
1974, with units ($1,000 minimum purchase) representing fractional
undivided interests in fixed pools of CDs of domestic commercial banks.
The more recent unit trust offerings, on the other hand, have represented
interests in fixed pools of CDs of foreign branches of domestic banks,
foreign banks, and U.S. branches of foreign banks.

III - 9
COMMERCIAL BANK CREDIT
(Per cent changes at annual rates, based on seasonally adjusted data)1/

12
months
ending

1978

QII

QIII

QIV

Oct.

Nov.

Dec.

1. Total loans and investments 2/

17.0

8.7

5.9

9.8

6.7

1.1

10.9

11.7

1.1

-10.3

-4.5

-20.0

-6.5

Investments

Treasury securities

Other securities

Total loans

1.9

17.1

-6.1

-36.2

-24.7

-61.8

-25.2

-7.5

8.5

9.0

4.8

7.1

3.6

3.5

7.5

19.1

11.7

12.1

15.3

16.8

3.9

14.6
13.0

Business loans

17.4

10.3

6.7

10.6

10.0

-0.5

Security loans

88.9

-26.8

-43.1

-67.7

-52.2

-13.6

Real estate loans

19.3

17.6

17.5

16.7

21.1

13.8

19.1

Consumer loans

23.7

15.6

n.a.

17.3

20.8

n.a.

Commercial paper
issued by nonfinancial firms3/

30.6

18.9

49.7

33.9

52.7

56.8

25.9

Business loans at
banks net of bank
holdings of bankers
acceptances

17.9

10.3

8.6

12.4

12.8

0.5

14.1

12.

Sum of items 10 & 11

18.8

10.9

11.8

13.9

15.8

5.3

14.9

13.

Memo item 12 plus
business loans from
finance companies

17.4

14.9e

18.8

17.7

7.8e

14.8e

-7.0

MEMORANDA:
10.

11.

9.1

n.a.--not available.
e-estimated
1/ Last-Wednesday-of-month series except for June and December, which are adjusted

to the last business day of the month.
2/

Loans include outstanding amounts of loans reported as sold outright to a bank's
own foreign branches, nonconsolidated nonbank affiliates of the bank, the bank's
holding company (if not a bank), and nonconsolidated nonbank subsidiaries of the
holding company.
Measured from end of month.

III -

banks has slowed and the ratio remains above its low recorded in late
1974 (see Chart on page 11).
Banks also issued large CDs and increased their reliance on nondeposit sources of funds to meet loan demand in December. The greater use
of nondeposit sources more than offset the previous month's decline and
boosted the fourth quarter net increase to $7 billion; security RPs and
Fed fund purchases from nonbank sources accounted for much of this increase.
Gross Eurodollar borrowings from foreign branches also rose over the quarter,
but claims on such branches increased by a like amount, resulting in only
a small net amount of funds acquired from this source. In addition to
these nondeposit sources of funds, banks began acquiring Treasury balances
under the new tax and loan account program in early November. These accounts
averaged over $6 billion in the final two months of the year.
With the further loan growth over the fourth quarter--financed
in part by security sales and enlarged use of nondeposit sources of funds-the ratio of loans to deposits for most classes of commercial banks had
increased by year end to near or above the 1974 peaks (see Chart on page 12).
Only large banks in New York City still maintained ratios substantially
below the 1974 levels.

The possibility of additional liquidity pressures

at large banks is suggested by the most recent data on the growth of loan
commitments, which indicate a further sharp rise in unused business loan
commitments in November, extending the trend evident for more than three
years.

This jump apparently reflected efforts by corporate treasurers to

augment their credit lines as a hedge against possible reductions in the
availability of funds if credit conditions tighten further.

III - 11
RATIO OF LIQUID ASSETS TO TOTAL LIABILITIES 1/
1/
AT LARGE BANKS INSIDE AND OUTSIDE NEW YORK CITY

(not seasonally adjusted)

Per Cent

1973

1974

1975

1976

1977

1978

l/ The liquidity ratio is calculated as the sum of Treasury and other
securities maturing in one year or less, loans to brokers and dealers
and domestic commercial banks, holdings of bankers' acceptances and
gross sales of Federal funds, all divided by liabilities less capital
accounts, valuation reserves, and demand deposits due to banks.

III - 12

Ratio of Loans to Deposits
(end of quarter, not seasonally adjusted)
Ratio scale
Small banks

Ratio scale

1.2

'I I I I I I I I I
1970

1972

1974

1976

1978

1970

1972

1974

1976

1978
Rati .oscale

Other Large Banks

-1.2

1.0

.8
Ling
exclud
negoti able/
CD( S

1970

1972

1974

1976

1978

1970

I
I

1972

1974

1976

1978

III -

Business Finance
Despite the December weakness in business loans at commercial
banks, total short- and intermediate-term business credit continued to
expand in the month.

Commercial paper issued by nonfinancial firms

grew $900 million in December--due in part to a less-than-seasonal runoff
at year end by public utilities--and business loans at finance companies
are estimated to have increased further. Nonfinancial commercial paper
also expanded strongly in the previous two months, increasing a near-record
$2.2 billion for the quarter as a whole.1 The $4.1 billion increase in
business loans at finance companies in the fourth quarter reflected
primarily expansion in automobile-related lending--both retail loans
on commercial vehicles and wholesale (or "floorplanning") loans--as well
as continued strength in equipment financing.
In longer-term markets, gross public offerings of corporate
bonds contracted to $1.1 billion in January, after totaling only $1.5 billion in December.

The relatively light slate of offerings in December

and January was due to reduced public utility financing and a continuing
paucity of higher-rated industrial issues.2

Major manufacturing and

1/ In addition, nonbank-related financial firms boosted their commercial
paper outstandings by $1.8 billion over the quarter. Bank holding
company paper grew by a record $2.8 billion, but sales of loans by
banks to their bank holding company affiliates decreased over recent
months, so these funds apparently are being passed through to nonbank
subsidiaries.
2/ Underwriters generally expect the refunding of a large volume of
maturing issues of financial corporations to boost bond offerings
in 1979. Moody's reported recently that 12 banks or bank holding
company issues totaling $715 million and 14 finance company issues
totaling $900 million will mature and likely be refunded during
1979. Indeed, part of the proceeds from Citicorp's $500 million,
floating-rate note issue offered in late January will be used to
redeem $225 million of notes falling due in 1979 and 1980.

III - 14

CHANGE IN COMMERCIAL PAPER OUTSTANDING
(Monthly totals or monthly averages, sea. adj., billions of dollars)

1977
Year
Total commercial paper
Bank-related1/
Nonbank related
Financial
Dealer placed
Directly placed
Nonfinancial

1978
Oct.

Nov.

Dec.

Outstanding
12/31/78

1.0

1.6

0.8

0.2

3.4

3.3

83.8

0.1
0.9
0.8
0.1
0.7
0.2

0.5
1.1
0.9
0.2
0.7
0.2

0.3
0.5
0.2
0.3
-0.1
0.3

0.8
-0.6
-1.1
-0.8
-0.3
0.5

0.9
2.4
1.6
0.2
1.4
0.8

1.1
2.2
1.3
0.5
0.8
0.9

15.8
68.0
48.1
8.8
39.3
19.9

1/ Not seasonally adjusted.
Note: Components may not add to total due to rounding.

CHANGE IN BUSINESS CREDIT AT FINANCE COMPANIES
(Monthly totals or monthly averages, sea. adj., billions of dollars)

Outstanding
11/30/78

1977
Year

1978
Oct.

Nov.

Dec.

0.9

0.6

0.2

1.8

1.3

1.0e/

Retail automotive (comm'l.)

0.3

0.2

0.3

14.4

Wholesale automotive
Accounts receivable 1/

0.3
--

-0.1

-0.2
--

1.0
--

0.3
0.2

12.1
6.7

Equipment loans & all other

0.3

0.2

0.5

29.5

Total business credit

1/ Includes factored accounts receivable.
e/ Estimated.

62.7

III - 15

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

1977

1979

1978

Year

QIII

QIVe /

Dec.e

Jan.f/

Feb.f/

Seasonally adjusted
Corporate securities--total

4,518

3,587

4,822

3,586

3,250

2,925

3,100

Publicly offered bonds

2,016

1,489

2,365

1,606

1,500

1,050

1,425

Privately placed bonds

1,501

1,366

1,428

1,333

1,250

1,200

Stocks

1,001

732

1,029

647

500

675

475

1,400

Not seasonally adjusted
Publicly offered bonds
By quality 1/
Aaa and Aa
Less than Aa 2/
By type of borrower

2,016

1,695

1,761

1,533

1,200

1,275

1,089
927

820
875

885
876

908
625

675
525

1,025
250

692

525

770

640

300

400

Industrial3/

700

578

560

418

375

Financial

624

592

431

475

525

500

621

640

328

423

821

437
184

466
174

183
145

336
87

10
0

625
196

Utility

Foreign securities--total
Publicly offered4/
Privately placed

1/
2/
3/
4/
e/
f/

Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes equipment trust certificates.
Classified by original offering date.
Estimated.
Forecast.

300

III

industrial corporations generally remain reluctant to issue long-term,
call-protected bonds at the relatively high level of current interest
rates, relying instead on alternative sources of funds to finance their
activities.1 For example, still substantial takedowns of privately
placed bonds by nonfinancial corporations in recent months have been
supplemented with a record volume of commercial mortgage financing from
insurance companies and commercial banks (see Chart on page 18). Also,
the unexpected strength in recent economic activity resulted in relatively
strong fourth quarter profits for many corporations; even allowing for
dividend increases, gross internal sources of funds probably were significantly augmented at many major corporations.
Mortgage Market and Consumer Credit
Net residential mortgage lending apparently declined somewhat
in December, due mainly to a reduced volume of financing at S&Ls.

Slower

deposit growth at nonbank thrift institutions during the fourth quarter
was accompanied by a fall off in S&L commitment activity.2 In addition,
the cost of mortgage and construction loans increased further and there
have been reports of tightening in nonrate lending terms.

S&L borrowing

from FHLBs was sizable during the quarter--with an especially large
increase recorded in December--and advances have remained strong (after

Public bond offerings by higher-rated industrial corporations would
have been even smaller in recent quarters if some companies had not
elected to raise longer-term funds to repay bank loans incurred for
the financing of acquisitions. This was the case for the $300 million,
Aa-rated industrial issue in January.
The year-end backlog of mortgage commitments outstanding at S&Ls was
slightly below its year-earlier level (measured in current dollars).

III - 17

FINANCING PATTERN OF NONFINANCIAL CORPORATIONS
(Billions of dollars, seasonally adjusted annual rates)

1977
Year

164.6
135.3
29.3

180.3
127.2
53.1

200.6
144.1
56.5

193.7
145.4
48.3

200.9
152.0
48.9

Net funds raised in markets

78.7

102.6

82.8

77.4

91.1

Com'l. paper & accept.
Finance Co. loans
Bank loans n.e.c.1/
Corporate bonds
Mortgages
Net new equity issues

2.2
10.3
20.0
24.5
19.0
2.7

2.6
8.4
50.8
17.5
22.2
1.0

4.3
6.3
18.5
26.5
26.5
0.7

3.5
0.1
19.3
25.8
27.9
0.8

8.2
12.5
20.2
21.5
27.6
1.0

49.4
0.8
48.6

49.5
15.0
34.5

26.3
-8.9
35.2

31.1
7.2
23.9

42.2
13.8
28.4

Capital expenditures
Gross internal funds
Financing gap

Financial uses of funds, net
Liquid assets
Other 2/

1978
Q3

1/ Includes a small amount of loans from U.S. Government.
2/ Includes consumer credit, net trade credit, and miscellaneous assets less
profit taxes payable and miscellaneous liabilities.
Source:

Flow of Funds, January 26, 1979.

Data for 1978-Q4 are preliminary.

III

- 18

COMMERCIAL AND INDUSTRIAL MORTGAGE ACTIVITY AT LIFE INSURANCE COMPANIES. /
(Quarterly data, seasonally adjusted)
$ Billions

Outstanding Commitments

- N10

New Commitments

1/ Reporting companies account for nearly 80 per cent of U.S. life insurance
company assets. Fourth quarter 1978 data include estimate for December.
Source:

American Council of Life Insurance.

III -

seasonal adjustment) in early January.1 However, the liquidity ratio
at insured S&Ls was a relatively high 9.0 per cent at year end, unchanged
from its year-earlier level. In the secondary market for home mortgages,
yields have risen further in recent FNMA biweekly forward commitment
auctions on an unusually low volume of offerings and acceptances. Mortgage
yields have remained about unchanged in the FHLMC weekly auctions, while
GNMA security yields--which typically move with bond yields--have edged
lower.
Consumer instalment credit is estimated also to have grown somewhat less in December than during the previous month, although its rate of
expansion for the fourth quarter as a whole was about in line with growth
in the previous quarter.

Despite fairly brisk loan growth associated with

robust durable goods sales in the fourth quarter, several measures of nonprice terms on consumer loans in November (latest available data) suggest
that consumer instalment lenders are becoming somewhat more selective.
At large finance companies, for example, the proportion of automobile
loans made with only minimal downpayment has declined (see Chart on page 22).
In addition, the average maturity of new-automobile instalment credit contracts at commercial banks has not lengthened much further in recent quarters,
although this is not the case for automobile loan maturities at finance
companies.

The November Survey of Senior Bank Loan Officer Opinion also

suggests a slight decrease in the willingness of commercial banks to make

The FHLB Board recently approved applications by two S&Ls to issue
unsecured and mortgage-secured commercial paper. Until January, only
holding companies of state-regulated, stock-chartered associations could
issue these securities.

III - 20
INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS
AT SELECTED S&Ls
Conventional home mortgages
Average rate on
Basis point
new commitments
change from
Spread1/
for 80% loans
month or
(basis
(Per cent)
week earlier
points)
10.38
-+10
8.98
-+30

Period
1978--High
Low

9.80
9.78
9.88
10.11

+5
-2
+10
+23

10.30
10.35
10.35
10.35
10.38

+2
+5
0
0
+3

10.38
10.38
10.40
10.40

0
0
+2
0

1978--Aug.
Sep.
Oct.
Nov.

Dec.

1
8
15
22
29

1979--Jan.

1/
2/

Per cent of S&Ls/
with mortgage funds
in short supply
69
17

+100
+ 72

+ 65
+ 84
+103
+107
+106

+85
---

Average mortgage rate minus average yield on new issues of Aaa utility bonds.
Per cent reporting supply of funds slightly or substantially below normal
seasonal patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Conventional
Govt.-underwritten
Amount
($ millions)
Offered Accepted
717
363
75
48

1978--High
Low

Dec

Jan

4
11
18
27
2
8
15
22
29

Yield
to

FNMAj1
10.92
9.28

Amount
($ millions)
Offered Accepted
1249
605
130
80

Yields on GNMA
guaranteed
mortgage backed
Yield securities for
to
immediate
delivery 1/
FNMAll
10.60
9.68
9.13
8.43

10.77

10.40

10.92

10.60

11.02

211

101

10.67

11.13

10.73

9.39
9.43
9.65
9.68
9.72
9.71
9.70
9.67
9.55

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 prepyment 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 required.
Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FHA-VA mortgages carrying the prevailing ceiling rate on such loans.

III - 21

CONSUMER INSTALMENT CREDIT1/
1978
1976
Total
Change in outstandings
Billions of dollars
Per Cent
Bank share (per cent)
Extensions
Billions of dollars
Bank share (per cent)
Liquidations
Billions of dollars
Ratio to disposable income
Automobile Credit
Change in outstandings
Billions of dollars
Per cent
Extensions
Billions of dollars

1977

1978e QIII

21.1
12.4
50.2

35.0
18.3
52.7

44.0
19.2
53.1

43.1
17.3
51.9

210.0
46.2

254.1
46.4

298.7
47.8

188.9
15.9

219.2
16.8

10.4
18.2
63.6

QIVe

Nov.

Dec.e

44.8
17.2
47.3

49.2
18.7
47.0

44.8
16.7
47.0

304.9
48.0

312.3
47.5

314.6
47.6

313.3
47.6

254.3
16.8

261.8
17.8

267.5
17.7

265.4
17.6

268.5
17.6

15.3
22.6

19.2
23.2

19.4
20.9

18.9
19.4

21.1
21.3

19.2
19.0

75.8

88.9

91.8

92.0

93.4

92.7

1/ Quarterly and monthly dollar figures and related per cent changes are seasonally
adjusted annual rates.
e - Based on early estimate for December.

III - 22
PROPORTION OF LOW-DOWNPAYMENT AUTOMOBILE
CREDIT CONTRACTS AT FINANCE COMPANIES

cent

Used auto

.. 1 %

New auto

*--~^
*~

I
1975

1974

Note:

1976

II
1977

11111111111
I
1978

III

(

Low-downpayment contracts are those for which credit extended equals
100 per cent or more of dealer cost (new) or wholesale value (used).

AVERAGE MATURITY ON NEW-AUTO CONTRACTS
AT COMMERCIAL BANKS AND FINANCE COMPANIES

Months
46

-- 42
Finance companies

1974

1 9

1975

Commercial banks

1
1976

I1 I

1977

I I

I1 I

1978

III -

consumer instalment loans, which may be due in part to the squeeze between
statutory ceilings on finance rates in some states and higher costs of
funds to the banks.
Government Securities Markets
Gross offerings of tax-exempt bonds declined in January from
the large volume in the final two months of 1978. The heavy year-end
volume of tax-exempt securities was almost entirely for non-refunding
purposes.

The upward movement in municipal bond yields throughout

most of 1978 and the September 1 IRS revised regulation amending tax-exempt
arbitrage restrictions have greatly reduced the attractiveness of issuing
new securities for refunding or advance refunding purposes. The Bond
Buyer index of tax-exempt bond yields climbed to 6.67 per cent in midDecember--its highest level since July 1976--but it is currently about
35 basis points lower.
Net offerings of marketable Treasury issues totaled about $2.2
billion

in January (not seasonally adjusted).

This represents a rebound

from the pace of Treasury marketable borrowing in December, when sales
of nonmarketable securities to foreign official institutions and foreign
private investors were substantial.

Since mid-December, sales of nonmar-

ketable issues to foreign official institutions have slowed appreciably,
although the Treasury auctioned about $1.2 billion equivalent of 2-1/2and 4-year, Swiss franc-denominated notes to private Swiss investors
in mid-January.

With December's German mark-denominated issue, the total

of foreign currency-denominated issues sold by the Treasury in the last
two months amounts to $2.8 billion.

The large sales of marketable and

nonmarketable securities kept the Treasury's cash balance at a high level.

III - 24

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

QIII

1978
QIVe/

Nov.

1979
Dec.e/ Jan.f/ Feb.f/

Seasonally adjusted
State and local government
securities, gross offerings
Total
Long-term
Short-term

5,714

6,421

5,723

5,197

7,283

4,650

4,600

3,919
1,795

4,403
2,018

3,924
1,799

4,143
1,054

4,583
2,700

3,000
1,650

2,600
2,000

3,654
2,320

3,080
1,641

-945
1,788

-255
3,053

1,256
2,003

3,056
1,650

2,227
2,466

U.S. Government securities,
net offerings
U.S. Treasury1/
Sponsored agencies

Not seasonally adjusted

State and local government
securities, gross offerings
Total
Long-term
Short-term

6,109

5,963

5,050

5,348

5,700

4,400

4,094
2,015

4,195
1,768

3,600
1,450

4,075
1,273

3,600
2,100

3,000
1,400

2,700
1,700

2,382
2,012

3,560
2,130

1,152
1,635

1,700
2,667

932
1,542

2,151
1,327

5,700
1,476

U.S. Government securities,
net offerings

U.S. Treasury-y
Sponsored agencies

I Marketable issues only.
/ Estimated.
Tf/ Forecasted.

III -

At the end of 1978, it totaled over $16 billion, and had declined only to
$15.5 billion at the end of January.l
Sponsored credit agencies borrowed about $2 billion, seasonally
adjusted, in December, maintaining the record high pace of borrowing established earlier in the year.

Nearly all of the December borrowing was by

the FHLB and FNMA, in association with a continuation of their strong
direct and indirect support of the residential mortgage markets.

Housing

agency borrowing slowed in January, although this decline was about offset
by increased borrowing by the farm credit agencies.

The new Treasury tax and loan system has been
large balances, with the Treasury maintaining
$2.5 and $3.5 billion. However, some banks in
have remitted funds back to the FR Banks when
reached self-imposed ceilings.

able to handle these
its FR balances between
the system occasionally
their Treasury balances

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

RESTRICTED

January 31,

1977

-31.059
120,585
-151,644

-10.170
29,457
-39,627

-11.201
30,664
-41,865

-7.802
35,067
-42,869

-8.045
36,930
-44,975

.2.612
12,924
-15,536

-9..33

Trade balance 1/
Merchandise exports
Merchandise imports

Change in net foreign
offices

U.S.

(excl.

-3.907

-5.142

-6.211

2.700

488

1.92

-,28
-3,220

-1,717
-2,203

-,s
-147

-,526
-2,369

/
/

3,478
-976

-3,142

-423

-487

-180

2,709

1,436

1,037

-136

38
206
580
-748
-297

-14
I
123
341
-978
881

Year

-,.353
114,694
-124,047

liab.

foreignn

official
inst.)

5.
6.
7.
8.

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

9.
10.
11.
12.
13.

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
Foreign net purchases of U.S. Treasury obligations

-7.82 .
415
853
-9,097
2.641

-3.050
1,130
1,325
-5,505
543

14.

Change in foreign official reserve assets in U.S.

13.062

35.456

1U.15

1A.964

3,922
6,802
2,338

29,414
5,989
53

14,476
757
-81

12,327
1,354
1,283

9,313
3,747

30,218
5,238

12,900
2,252

12,979
1,985

-2.332

-237

-2

13.946

2.254

4,339

-15,265

(increase +)

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

By Type
18.
19.

U.S. Treasury securities
Other 2/

20.

Change in U.S.

21.

All other transactions and statistical discrepancy

Current

ccount

reserve assets (increase -)

Current account 3/

Oct.

nWo.

2L486
13,026
-15,512

.2436
13,097
-15,533

41
6 9 59

-6,959

2
(
1J33

6,54

-6,854

-4.596

6,627
-3,329

-2,392
2,012

151
-2,928

-986

-990

-1,969

635

-696

-2,649

-5.

16.
17.

S.et.

positions of banking

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

15.

. ear

1.
2.
3.

1979

.420

674

150

-553
199
-56
-696
291

-217
50
1
-268
-155

18
1,027
-1,104
805

108
-462
-1.034

317
99
9407
254
-36
621

4.639

-874

7.250

4,399

-3,099
-2,389
5

5,259
-1,645
1,025

-477
-335
-62

6,164
1,250
-164

5,394
-713
-282

-5,728
24S

3,167
1,472

1,328
-2,202

4,661
2,589

4,612
-213

467

-85

968

9.371

3,85

723

-3,721

-3,261

,a.

n.ae.

2,037

n.a.

n.e.

International accounts basis, seasonally adjusted.
Includes deposits in banks, commercial paper, bankers' acceptances, and borrowing under repurchase agremnts.
Seasonally adjusted.
Data not shown separately because of break in series.
Note: Capital Account data for December are not yet available. Trade data for December, the fourth quarter, and the year 1978 are shown in the text table on page IV-10.

RISTUICTED

INTERNATIONAL DEVELOPMENTS

Forein exchange markets.

Since the last green book, the

behavior of the dollar's weighted-average exchange value has exhibited
two distinct trends, as shown in the Chart.
From mid-December until the end of the month, the dollar's
value fell more or less steadily.

There was a sharp break around the time

of the December 16 OPEC announcement that graduated 1979 price increases
would total 14.5 per cent:
per cent in four days.

the dollar's average value fell about 2-1/2

Additional selling pressure developed toward the

end of the month.

Since the turn of the year, however, the dollar's value has been
on a generally upward path.

The rising trend was broken briefly around mid-

month when statements and actions by German officials intimated that
authorities there were beginning to re-emphasize the inflationary dangers
of large-scale intervention in exchange markets.

U.S. authorities were net purchasers of a small amount of foreign currencies.
Over the seven weeks as a whole, the dollar's average exchange
value has fallen about one per cent, and it is now about eight per cent
higher than its low point at the end of last October.

(FR)
Confidential
Strictly

1
CHART

Class
WEEKLY SERIES

FOMC

1/31/79

IV - 2
1973=100
MARCH

toe

WEIGHTED AVERAGE EXCHANGE VALUE OF U.S.

DOLLAR
- 104

Daily:
FOMC 19 Dec 1978
29 Dec 1978
30 Jan 1979

87.2
86.5
88.4

100

IV - 3

The largest net changes in the dollar's value vis-a-vis individual
currencies since mid-December were against the mark and other snake currencies
and the French franc.

The dollar's value declined by about 2-1/2 per cent

in terms of each of those currencies.

In contrast, the dollar's value rose

(by 1-to-2-1/2 per cent) in terms of the yen and the Canadian dollar.
During the period of downward pressure on the dollar's value
in the last half of December, the New York Trading Desk sold over $1-1/2
billion equivalent of marks in about 50-50 proportions for the System and
the Treasury.

The System financed its share by swap drawings, and the

Treasury drew on its mark balances.

During late December, the Desk also

made small purchases of Swiss francs and yen,
and
sold Swiss francs when necessary to relieve downward pressure on the dollar.
As the dollar's value rose during January, the Desk became chiefly a net
buyer of marks, Swiss francs, and yen,
. The System's share in those transactions has
been used to reduce outstanding System swap drawings by about $600 million
from their peak value of $5.5 billion (computed using exchange rates
prevailing when drawings were made) reached at the end of 1978.
On January 17 the U.S. Treasury marketed the second issue in its
planned series of foreign-currency-denominated notes.

Swiss franc-denominated

notes worth $1.2 billion were sold in a heavily oversubscribed offering.
Maturities of 2-1/2 and 4 years were offered at interest rates of 2.35 and
2.65 per cent respectively.

IV - 4

In January both the Swiss and Japanese governments announced
that restrictions on capital inflows to their financial markets from abroad
were to be relaxed.

Neither action appeared to generate significant upward

pressure on the currency involved.

IV - 5

Borrowing in international capital markets.

Total borrowing in

international capital markets in the second half of 1978 was close to the
very high first-half level, raising the total of borrowings for the year
to over $100 billion, an increase of 45 per cent over 1977.

Revisions to

the Euro-credit data will undoubtedly raise this total further, perhaps
by $2-3 billion.

Almost all the increase in total borrowing was in

extensions of new medium-term Euro-credits.

The increase in outstanding

Euro-credits was much less dramatic than the rise in new credit extensions because much of the increase was used to refinance older drawings
or maturing debt.

Euro-bond issues declined in 1978 but foreign bond

issues picked up.

In the market for medium-term Euro-credits, presently available
data show $64 billion of credits completed in the full year 1978, up
almost 90 per cent from the 1977 total compared with a 19 per cent rise
in 1977 over 1976.

Because of the absence of data on repayments it is

not possible to estimate precisely the extension of net new credit.
However, data on external claims of banks in the G-10 countries suggest
that outstanding medium-term credits may not have risen significantly
faster in 1978 than in 1977.

About $10 billion of the credits arranged

in 1978 (one-third of the increase over 1977) appear to have been refinancings of outstanding debts repaid ahead of schedule to take advantage
of better terms available in the market; such refinancings had been
negligible in 1977.

In addition, repayments of maturing loans that

borrowers wished to refinance also increased in 1978.

IV - 6

Borrowing in International Capital Markets
(in billions of dollars)
1976
Year
I.

Developed countries
Canada
France
Italy

Year

1978
1st H

2nd H

28.7

34.2

18.8

64.4

34.1

30.3

10.9
.9
.7
2.0
2.0
5.1

Medium-term Euro-credits:
total1/

1977
Year
2nd H

13.4
.5
1.9
.8
1.9
2.5
5.8

6.3
.2
.4
.7
1.2
.5
3.3

30.;1
6.8
2.5
2.7
2;0
4.6
10.3

15.6
5.6
1.3
1. 1
1.0
1.8
4.8

14.5
1.2
1.2
1.6
1.0
2.9
5.4

3.7
.7
.5
.9
0
1.1
.5

6.0
.4
.1
1.8
0
1.7
2.0

3.0
.4
.1
.9
0
.4
1.2

9.9
1.6
1.6
1.2
1.8
1.9
1.8

6.3
.7
1.1
.8
1.0
1.7
1.0

3.6
.9
.5
.4
.8
.3
.7

19.4
1.4
3.9
5.0
1.9
7.2

9.5
;5
1.8
2.5
1. 1
3.6

10.0
1.0
2.1
2.5
.8
3.6

2.1

4.5

2.5

2.0

1/.

Spain
United Kingdom
Other
Oil-exporting countries
Algeria

Indonesia
Iran
Nigeria

Venezuela
Other
Non-oil LDCs

.9
3.8

11.3
.8
2.3
2.9
.7
4.6

2.5

3.1

11.0
.9
3.3
2.1

Argentina
Brazil
Mexico
Philippines
Other
Communist countries
Int'l. org's. and others

II. Euro-bonds: total
By borrower: LDCs
all other
U.S. dollar
German mark
other

By currency:

III.

Foreign bonds:
By borrower:
By market:

IV.

total
Canada
others
U.S.2/
Switzerland
Japan
other

Total borrowing

7.2
.5
1.6
2.3
.4
2.4

15.4
1.0
14.4
10.0
2.8
1.6

19.3
2.3
17.0
12.3
5.1
1.9

8.9
1.2
7.7
5.4
2.8
.7

16.2
2.9
13.3
7.7
6.8
1.7

9.2
1.6
7.6
4.8
3.5
1.0

7.0
1.3
5.7
3.0
3.3
.7

18.9
6.1
12.8
10.6
5.4
.3
2.6

15.6
3.3
12.3
7.5
4.7
1.4
2.0

8.5
1.7
6.8
3.8
2.6
1.3
.8

19.9
3.4
16.5
6.1
6.6
4.5
2.7

10.3
1.8
8.5
3.7
2.8
2.4
1.4

9.6
1.6
8,0
2.4
3.7
2.1
1.3

63.0

69.0

36.2

100.5

53.6

46.9

Completed credits of over one-year maturity.
Figures may differ from statistics of U.S. international transactions, which
are on n drawdowns bsis.
"/
Less thn $50 million.
Source: World Bank.

.l
2/

IV - 7

Credits completed in the second half of 1978 were somewhat
less than in the first half, mostly because of reduced borrowing by
Canada, Venezuela, and several other oil-exporting countries.

The

United Kingdom and Italy stepped up their borrowing, but in the case of
the United Kingdom this was due to the advance refinancing of loans to
the Government ($1.5 billion) and the Electricity Council ($500 million).
Other large refinancings of loans repaid ahead of schedule in the second
half were by Denmark ($1.2 billion) and Sweden ($1.0 billion).

For 1978

as a whole the largest increase in borrowing by country category was in
loans to developed countries, notably Canada, Italy and the U.K., but the
bulk of the advance refinancings also concerned loans to developed countries.

In contrast, advance refinancing was relatively unimportant for

the other country categories, where almost every one of the countries
individually listed in the table borrowed much more last year than in
1977.
During the second half of 1978, spreads and maturities on
Euro-credits generally continued to become more favorable to borrowers,
but by the fourth quarter there were signs that the trends were moderating or reversing.

While spreads continued to fall on average, by the

fourth quarter some borrowers were obtaining terms no finer than those
obtained several months earlier.

Prime borrowers continued to arrange

credits with spreads of 1/2-3/4 per cent over LIBOR.

The Bank of

England maturity series shows the average maturity of new Euro-credits
rising from 8-1/2 years in the second quarter to almost 9 years in the
third, then falling back to 8-1/2 years in the fourth quarter.

IV - 8

Fewer bonds were issued in the international bond markets in
the second half of last year than in the first.

New Euro-bond issues

declined about 25 per cent, to $7.0 billion, primarily because of a drop
of almost 40 per cent in U.S. dollar issues.

The volume of dollar issues

held up fairly well through the third quarter, when they accounted for a
little over one-half of total issues, about the same share as in the
previous three quarters.

But in the wake of the long decline in the

exchange rate of the dollar prior to November 1, and with the renewed
rise in long-term interest rates in the United States, dollar issues
shrank by more than one-half in

the fourth quatter; their share-of total

issues in the market declined to 30 per cent.

There was some recovery

between October and December but in December dollar issues were still
depressed.

DM-denominated Euro-bonds rose sharply in volume in the

fourth quarter, when their share rose to 60 per cent from 35-40 per cent
in the preceding three quarters.

For the full year 1978 Euro-bond issues

were about 15 per cent below the 1977 volume.
New issues of foreign bonds experienced only a small decrease
in the second half.

Issues in the U.S. market were down sharply, and a

tightening of the Japanese bond market led to some falling off there, but
Swiss issues boomed as bond yields in Switzerland continued their decline
to record low levels (reached in January 1979).

Total foreign bond

issues rose 28 per cent in 1978 with much higher volume in Japan (up
three-fold) and Switzerland.

IV-9

U,S. International Transactions.

The merchandise trade deficit

in December was $24.5 billion at an annual rate (Census basis), with both
exports and imports continuing at about the same levels as during the past
several months.

The deficit for the fourth quarter, also $24.5 billion at

an annual rate, was only slightly smaller than the deficits in either the
second or third quarters.

For the year 1978 the deficit was $28.5 billion.

The trade deficit on a Census basis has been running about
$5-6 billion (annual rate) smaller than the trade deficit on an international
accounts basis.

About one-fourth of the difference is attributable to

incomplete coverage of merchandise transactions in the Census data,
particularly on the import side.

The rest of the difference occurs

because of the exclusion of military sales and purchases from the merchandise
lines in the international accounts.

These military transactions are

included with all other military sales and purchases of goods and services,
and are shown separately in the international accounts under "goods and
services" transactions.

The international accounts basis merchandise trade

data are scheduled to be released on Thursday, February 1.

The table below

shows the trade data on both bases.
Exports increased by about 5 per cent in the fourth quarter with
about half of the increase from higher prices.

A strong increase in the

volume of nonagricultural exports (largely industrial materials and machinery)
was partly offset by a drop in the volume of agricultural exports from very
high mid-year rates.

IV-10

U.S. Merchandise Trade
(in billions of dollars, seasonally adjusted annual rates)
Census Basis

International Accounts Basis

Exports

Balance

Exports

Imports

Balance

121.2
143.6

1977
1978

Imports
147.7
172.0

-26.5
-28.5

120.6
n.a.

151.7
n.a.

-31.1
n.a.

123.4
142.1
150.8
157.7

162.1
168.8
176.0
182.1

-38.7
-26.8
-25.2
-24.5

122.7
140.3
147.7
n.a.

167.5
171.5
179.9
n.a.

-44.8
-31.2
-32.2
n.a.

156.1
159.1
157.8

181.7
182.5
182.3

-25.5
-23.3
-24.5

156.3
15 7 .2e
n.a.

186.1 e
1 8 6 .4e
n.a.

-29.8e
-29.2 e
n.a.

1978:
Qtr.
Qtr.
Qtr.
Qtr.

1
2
3
4

October
November
December

e/ Monthly international accounts data are unpublished estimates and are
subject to considerable revision.
Imports rose by about 3 per cent in the fourth quarter.

Most of

the increase was in non-oil imports, spread over most major commodity
categories; about half the increase in non-oil imports was from higher prices.
The value of oil imports was

about the same in the fourth quarter as in the

second and third quarters (including imports into the U.S.

Virgin Islands).

hile the fourth quarter oil import volume was slightly lower (8.85 million
barrels per day) than in the previous two quarters, the average import price
was slightly higher ($13.35 per barrel).

In December the average import

price jumped to nearly $13.50 per barrel after averaging between $13.20
and $13.30 since March.

IV-11

In the financial sector of the international accounts, there
was large-scale U.S.

and foreign central bank intervention in the exchange

markets in the fourth quarter of 1978.

The foreign intervention and the

use by the United States of swap drawings for intervention are reflected
in the estimated $16 billion net increase in G-10 countries' reserve
assets in the United States.

In addition, the U.S. used nearly $2 billion

equivalent of the foreign currency proceeds of market borrowings.

Most

of the $16 billion increase in G-10 reserve holdings was invested in U.S.
Treasury securities,
with U.S.

including nonmarketable issues issued in connection

- initiated swap drawings.
In January, as intervention activity moderated,

the rate of net

foreign central bank purchases of Treasury securities also slowed, helping
to restore a more normal (narrower) interest-rate differential between
short-term Treasury bill rates and other private money-market instruments.
Private capital outflows as reported by banks and securities
dealers (including an estimate for December) appear to be about $7 billion
in the fourth quarter, compared to less than $1/2 billion in the third quarter.
For October-November combined,

the most recent period for which

data are available, banks reported a net capital outflow of $5.3 billion,
with indications of further substantial outflows in December.
increase in U.S.
October-November,

A sizeable

bank claims on nonbank foreigners, about $3 billion in
may have reflected credit demands related to financial

positioning in anticipation of a further depreciation of the dollar.

IV-12

U.S. International Transactions Summary
(in billions of dollars, n.s.a., (-) = outflow)

1977
Year
1.
2.

Private capital trans. adj. 1/
Private capital as rept. net

Reporting bias 2/

4. OPEC official net investments
5. Other foreign official assets
6. U.S. reserve assets
7. Trade balance, n.s.a. 3/
8.

All Other 4/

Q-1

Q-2

Q-3

-6.4
-6.4

-7.6
-5.8

4.6
3.6

-.2
-.5

-1.8

-2.4
-3.1
.3

-1.6
6.3
*

-.3
-.5
-.1

6.0
29.5
-.2

1.4
13.6
.3

1 9 7 8
Sept.

Oct.

Nov.

1.8
2.8

-.2
-1.0

-5.0
-5.0

-1.0

1.3
6.0
-.1

-.7
5.1
1.0

-31.1

-11.1

-7.3

-9.6

-2.6

-2.3

-1.9

2.2

3.4

7.9

5.1

1.7

-4.7

1.5

-31.2

-32.2

-31.3

-29.8

-29.2

-5.5
-12.4

-10.7
-15.3

n.a.
n.a.

Memoranda: (seasonally adjusted annual rates)
9. Trade balance
-31.1 -44.8
10. GNP net exports of
goods and services
-10.9 -24.1
11. Current account balance
-15.3 -27.4

1/ Includes bank-reported capital, foreign purchases of U.S. Treasury securities, and
other private securities transactions.
2/ Adjusted for reporting bias in bank-reported data associated with week-end transactions.
See page IV 10-11 in the June 1976 greenbook.
3/ International accounts basis. For seasonally-adjusted number see line 9.
4/ Includes service transactions, unilateral transfers, U.S. government capital, direct
investment, nonbank capital transactions, and statistical discrepancy.
*/ Less than $50 million.
NOTE:

Capital account data for December are not yet available.Trade data for December,
fourth quarter, and the year 1978 are shown in the text table on page IV-10.

IV-13

A large part of the increase in claims on nonbanks apparently took the form of
financing through bankers' acceptances.

Bankers' acceptances are a con-

venient vehicle for accelerating the conversion of the proceeds of dollardenominated trade receivables into foreign currencies.
OPEC banking and security holdings in the United States are
estimated to have increased by slightly more than $1 billion in the
fourth quarter.

For the year as a whole, OPEC holdings in the United States

are estimated to have fallen by almost $1.5 billion.
Foreign private purchases (net) of U.S. corporate stocks were
negligible in November, bringing the total for 11 months to $1.5 billion,
most of which occurred in the rising market in the second quarter.

U.S.

net purchases of foreign securities were about $250 million in November,
bringing the total for 11 months to $3
$54 billion for the year 1977.

billion, considerably less than the

The decline in U.S. purchases of foreign

securities in 1978 largely reflects foreign borrowers' reluctance to finance
with fixed-interest U.S. dollar-denominated long-term debt.

IV - 14

Foreign Economic Developments.

A major factor in foreign

economic growth performance continues to be the pace of economic
activity in Germany and Japan.

As shown in the accompanying chart,

there was a pickup in GNP growth in both of these key countries
in 1978, albeit only a modest one in Japan.

Similarly, there also

was an acceleration of growth in Canada, France, Italy, and the
United Kingdom in 1978.
According to provisional data, German GNP rose by about

3-1/2 per cent between 1977 and 1978.

This figure implies that

between the third and fourth quarters of 1978 GNP increased by
nearly 6 per cent (s.a.a.r.) if the first three quarters of the
year are not revised.

Data on Japanese industrial production in

the 3-month period ending in December indicates a rate of growth
of 9 per cent (s.a.a.r.) over the previous 3-month period.

If the

pace of activity indicated by the latest German GNP and Japanese
industrial production data is sustained, other foreign countries'
export and output performances can be expected to be enhanced.
During the course of last year, there was a fairly general pattern of decline in price inflation rates in the major
foreign industrialized countries.

As measured by the change between

the latest 3-month period and the previous 3-month period, inflation
rates are very low in Germany and Japan, and of the major countries,
only Italy has a rate of consumer-price inflation that exceeds 10
per cent.

Real GNP in Major Industrial Countries
Percentage Change from Previous Year

Percent
S8

-18
1976

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1978 *

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GERMANY

JAPAN

1978 tigures tot Japan. Canada, France, Italy, and the United Kingdom re estimates.
Weighted average

-14

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CANADA, FRANCE, ITALY,
AND UNITED KINGDOM 1/

I;
C
I
.
UNITED STATES

1
-- 2
'I

Consumer and Wholesale Prices in Major Industrial Countries
(percentage change, from previous period or as indicated)

Latest 3 Months
from:
Previous
1977

___1976

1978

1977
Q4

1_978
Q4

3 Months
(at Ann. Rate)

Year
Ago

Latest
Month

Canada: CPI
WPI

7.5
4.3

8.0
9.1

8.9
n.a.

2,2
1.1

1.8
2.7

2.4
3.0

2.5
1.5

1.6
n.a.

6.5
16.6

8.4
11.0

December
November

France: CPI
WPI

9,6
7.4

9.5
5.6

9.2
4.3

1.9
0.0

1.6
1.2

2.9
2.0

2.7
1.8

2.1
3.1

8.5
12.8

9.4
8.3

December
December

Germany: CPI
WPI

4.6
5.8

3.9
1.8

2.6
-0.3

0.2
-0.9

1.3
1.0

0.9
0.3

0.0
-0.6

0.1
0.0

0.3
0.2

2.3
0.8

December
December

Italy: CPI
WPI

16.8
22.9

18.4
17.4

12.1
8.4

3.3
2.0

2.6
2.1

3.0
2.3

2.4
1.8

3.0
2.3

12.6
9.3

11.5
8.8

December
December

Japan: CPI
WPI

9.7
5.0

8.3
1.9

4.3
-2.5

0.8
-0.7

0.9
-0.5

2.0
-0,3

0.8
-1.7

0.2
-0,6

0.6
-2.5

3.9
-3.2

December
December

United Kingdom: CPI
WPI

16.6
17.3

15.8
19.8

8.3
9.1

1.5
1.4

1.7
2.3

2.7
1.8

1,7
1.9

1.7
1.7

6.9
6.8

8.1
7.9

December
December

United States: CPI
UPI

5.7
4,6

6.5
6.1

7.6
7,8

1.1
1.1

1.7
2.4

2,6
3.0

2.4
1.5

2.0
2,3

8.3
9.7

9.0
9.6

December
December

Real GNP and Industrial Production in Major Industrial Countries
(percentage change from previous period, seasonally adjusted)

1978
1976

5.5
5.1

2.7
4.0

n.a.
n.a.

0.7
0.6

1.0
1.4

5.8
9.4

2.0
1.4

n.a.
n.a.

1.8
3.0

0.3
0.8

5.7
7.9

2.6
2.7

3.4 -0.1
n.a. 0.0

-0.6

5.7

GNP
IP

Germany:

2.1

Q3
0.9
1,8

1978

Q4
n.a.
n.a.

September
*

3.3

October 1978
November
*

0.1

0.5

n.a.

-0.3

n.a.

1.6

-0.8

0.6
3.2

1.5

n.a.

1.7

0.0

0.8

1.6

December
*

n.a.
*

n,a.
*

n.a.

GDP
IP

1.7
1.1

n.a.
n.a.

2.0
5.5

-2.2

0.7
1.0

na.

12.4

GNP
IP

6.4
11.1

5.4
4.2

n.a.

2.3
2.9

1.0
1.7

1.0
0.5

n.a.

6.1

2.9
1.9

1.9
3.8

n.a.
n.a.

0.2
1.2

1.8
3.7

0.8
0.4

n.a.

-1.0

-1.6

0.8

5.7
10,1

4.9
5.6

3.9

0.0

2.1

0.6

1.5

0.5

0.6

5.8

0.2

3.1

2.1

1.7

0.5

0.6

Japan:

United Kingdom: GDP
IP
United States: GNP
IP
Sitr

GDP
IP

France:

1978

GNP
IP

Canada:

Italy:

1977

bL'I
oa-a
oacta

e on monni Dasis.
ar not pu
are no puolisnea on montnty Dass

0.0

n.a.

2.2

4.6
*

1.2

3.6
*

-0.2

0.0
*

1.3

n.a.
*

1.0
*

n.a.

a/
Trade and Current-Account Balances of Major Industrial Countries(billions of U.S. dollars; seasonally adjusted)

1977

1977
Canada:

France:

Germany:

Italy:

Japan:

1978

-0.6

Trade
Current Account

2.7
-3.9

3.1
0.5 1.0
n.a. -1.2 -0.7

Trade
Current Account

-2.1
-3.3

0.5 -0.5 0.1
n.a. -0.8 -0.4

Trade
Current Account b/

16.5

20.4

3.8

8.3

3.7
-2.0

4.8
3.8

1.2

1978

Sept.

Oct.

Nov.

Dec.

0.6 0.6
-1.0
-1.2

0.6

0.5
*

0.1
*0

0.4
*

0.1
*

n.a.

0.3
1.4

0.3
0.9

0.0
n.a.

0.3

0.2

0.1

-0.2

0.0

4.3
1.6

5.0
2.0

5.5.
-0.8

n,ar

2.3
0.2

2.2
1.9

0.5
1.8

-0.8
n.a.

n.a.
n.a.

0.1

0.3

-0.1

2.4
1.6

0.8
0.2

1.6
0.8

1.4
0.8

-0.1

5.5

1.9
2.0

n.a./
1.6

Trade
Current Account b/

-2.5
2.3

Trade
Current Account

17.3
10.9

24.7
16.6

4.2
2.7

4.6
3.1

7.4
5.5

6.8
4.8

6.7
4.5

3.9
1.7

-2.9
0.8

-2,0
0.2

-0.1
1.0

0.1
1.1

-1.1
-0.8

-0.3
0.2

-0.6
0.0

0.1
0.8

-0.5
-0.3

0.2
0.4

-0.4
-0.1

0.3
0.5

-7.8
-3.1

-8.0
-3.8

n.a.
n.a.

-2.6
*

-2.5
*

-2.4
*

n.a.

United Kingdom:

United States:

Trade
Current Account
Trade
Current Account

-31.1
-15.3

n.a. -0.2 -0.2
n.a. 2.3 0.7

-0.1
0.3

n.a. -7.3 -10.2 -11.2
n.a. -2.9 -7.0 -6.9

-The current account includes goods, services, and private and official transfers.
Not seasonally adjusted.
Seasonally-adjusted data for December are not yet available; 1978 total is based on unadjusted data.
* Comparable monthly current-account data are not published,

n.a.

IV - 19

The German trade surplus in 1978 was some $20-1/2 billion,
up $4 billion from its 1977 level.

For Japan, the 1978 trade surplus

was about $25 billion, over $7 billion more than the 1977 level.
Japanese trade volumes seem to be responding to the yen's appreciation, and the mark's strength appears to be having a similar
effect on German trade volumes.

There has been a dramatic improve-

ment in the trade balances of France, Italy, and the United Kingdom,
especially compared to the 1976 outcomes of $4 - 6-1/2 billion
deficits in each of those countries.
Individual country notes.

The new government in Japan

appears to be placing less emphasis than its predecessor on expansion of the domestic economy as a way of reducing Japan's currentaccount surplus.

At the end of 1978, the government abandoned

Japan's summit commitment of 7 per cent growth for the fiscal year
ending March 1979.

On January 11, the Japanese cabinet approved

an only moderately expansionary budget for fiscal year 1979.

The

new budget calls for an increase of about 12 per cent in general
account expenditure over last year's total (including both the
original budget and the September supplementary budget), and the
government's fiscal investment and loan program is to be increased
by about 8 per cent.

According to official Japanese projections,

the ratio of government deficit to government expenditures is expected to approach 40 per cent.

IV - 20

Although the 1978 current-account surplus reached
$16-1/2 billion (compared with $11 billion in 1977), the adjustment of trade volumes to past exchange rate changes as well as
to special programs (such as emergency imports) is continuing and
in the fourth quarter the current-account surplus fell to $7 billion
(s.a.a.r.).

Average export volume in the 3 months ending in

November was nearly 3 per cent below its level a year earlier; over
the same period import volume rose by 12 per cent.

The growth in

the volume of manufactured imports was especially strong.
Despite the weakening external sector, activity in the
domestic economy has strengthened somewhat in recent months.
Official Japanese forecasts of 6 per cent GNP growth in the year
ending March 1979 imply growth of about 9 per cent (s.a.a.r.) in
the last 2 quarters of that year.

Conditions in the labor market

are virtually unchanged, however, with unemployment at high levels.
Neither the consumer price nor the wholesale price index indicates
much inflationary pressure in Japan.
In Germany, recently released provisional data on real
GNP indicate a rate of growth of about 3-1/2 per cent between 1977
and 1978, which confirms earlier evidence of a strengthening in
economic activity since last summer.

The rate of unemployment de-

clined gradually throughout most of 1978 and the average number of
unemployed was below 1 million for the first time since 1974.

IV - 21

The current-account surplus of DM 16 billion ($8-1/4
billion) for the year exceeded most expectations and is the
largest surplus since 1974.

Similarly, the 1978 trade surplus

is second only to the record 1974 surplus.

However, in constant

(1970) prices, the trade surplus for the first 3 quarters of 1978
was DM 18 billion, compared to DM 38 billion in 1974 and DM 20
billion in 1977.

This decrease in the trade volume surplus may

be attributable to the recent appreciation of the mark.
One area of concern for the Bundesbank has been the
relatively rapid expansion of the money supply.

Central bank money

in 1978 increased by nearly 12 per cent, exceeding the Bundesbank's
target of 8 per cent.

Furthermore, the rate of increase accelerated

in late 1978 and is currently 13 per cent (fourth quarter over third
quarter, s.a.a.r.).

In December the Bundesbank set its 1979 target

to be a 6-9 per cent rate of growth for central bank money between
the fourth quarter of 1978 and the fourth quarter of 1979.

Since

the announcement of the target, the Bundesbank has reduced rediscount
quotas by DM 5 billion, raised reserve requirements by 5 per cent,
and increased the Lombard rate from 3-1/2 to 4 per cent.
Recent economic developments in France have been marked
by a sharp recovery of the trade and current accounts, both of which
moved into surplus in 1978 following large deficits in 1976 and 1977.
Improvements on trade in food, automobiles, and energy products account
for the bulk of the gains.

Domestic activity has shown few signs of

IV - 22

strength in recent months, with the level of industrial production
in November about the same as it had been earlier in the year.
However, recent business surveys indicate an improvement in the
business climate.

In response to rapid increases in recent years

in the social insurance system's deficit (about a third of the overall public sector deficit), the government has announced an increase
in most of the system's charges and revisions in some benefits,
effective this month.
In the United Kingdom, real GDP increased by 3-1/2 per
cent (s.a.a.r.) between the second and third quarters of 1978.
Contributing to this growth was an 11 per cent (s.a.a.r.) increase
in real private consumption expenditures, while the volume of gross
fixed capital formation and government spending was virtually unchanged.

Data on retail sales and provisional data on consumption

indicate that consumer spending may have leveled off in the fourth
quarter of 1978.

Industrial production figures for the 3 months

ending in November -- 6-1/4 per cent (s.a.a.r.) below the previous
3 months' level -- do not indicate much strength in U.K. domestic
output.
The source of the strength in British consumer demand has

been a surge in real personal disposable income, attributable
primarily to wage increases that have outstripped price increases.
In the 12 months ending November 1978, average earnings rose by
14-1/2 per cent while consumer prices increased by 8 per cent.

The

rate of growth in wages has created some concern about the outlook for
the U.K. economy.

The government was forced by Parliament in

IV - 23

mid-December to abandon most of the measures it had been using
in its attempt to enforce its (nonstatutory) 5 per cent limit to
wage increases.

In January, the United Kingdom was hit by several

strikes in support of pay claims far in excess of the government's
5 per cent limit.

Nevertheless, a substantial number of British

workers have agreed to pay increases within the government's guidelines, and so it is difficult to tell at this stage what the future
course of average wages will be.
Industrial production in Canada in the latest 3 months has
increased by nearly 13 per cent (s.a.a.r.) over the previous 3month period.

Reflective of this growth in output, the Canadian

Conference Board's most recent quarterly survey of business attitudes showed an increased willingness to invest due to higher
profits and capacity utilization rates.

However, concern was ex-

pressed about the effect on future investment of rising interest
rates -- the Bank of Canada's bank rate was raised from 10-3/4 to
11-1/4 per cent at the beginning of January and short-term money
market rates subsequently rose an equivalent amount.
Economic activity in Italy has rebounded strongly after
the spring and summer pause; industrial production in SeptemberNovember 1978 was 26 per cent (s.a.a.r.) higher than in the previous
3 months.

The main sources of strength appear to be consumer

spending and exports; at the same time, investment continues to lag.
The strength of exports -- in September-November the value of

exports (customs basis, s.a.) rose by 17 per cent (quarterly rate)

IV - 24

over the previous 3 months -- has enabled the external sector to
continue in substantial surplus, despite a sharp rise in imports
reflecting the upsurge in activity.

The strong trade performance,

plus a large services surplus due mainly to tourism, is expected
to produce a current-account surplus of about $5 billion in 1978,
more than twice the 1977 surplus.
The Italian government has completed work on its 3-year
economic plan, the Pandolfi Plan, which has goals similar to those
announced last year -- higher growth of output, employment, and investment and a reduction of the inflation rate and the public-sector

deficit (as a percentage of GDP).

A crucial aspect of the plan is

the assumption that real wages will be stable; however, the trade
unions' demands in the current round of negotiations of the 3-year
contract renewals would entail a significant real wage increase.

line with the government's intention to raise investment by
providing more credit for the private sector, the Bank of Italy
announced on January 18 that it is relaxing the existing ceiling on
bank lending for the period ending March 31.
The Swiss National Bank announced on January 10 that it
will not set a money supply growth target for 1979, thereby indicating that exchange-rate considerations will continue to dominate
monetary policy.

Intervention to hold down the value of the Swiss

franc led to an M1 growth of about 17 per cent in 1978, more than

IV - 25
triple the 5 per cent target rate.

A recent cantonal bond issue

set a coupon of 2-3/4 per cent -- equal to the post-war low -- as
the very high money-market liquidity continues to depress Swiss
interest rates.

APPENDIX A*
THE FEDERAL BUDGET FOR FISCAL YEAR 1980

Overview
On January 22, 1979, President Carter submitted his fiscal
year 1980 budget to Congress. As the President promised last fall,
his new budget imposes considerable restraint in the growth of Federal
spending and reduces the size of the Federal deficit in fiscal years
1979 and 1980. For fiscal year 1980, the budget calls for unified outlays of $531.6 billion and projects receipts at $502.6 billion, and the
resulting unified budget deficit for the fiscal year is expected to be
$29.0 billion (see Table 1), significantly less than the $37.4 billion
deficit estimated for fiscal year 1979.
The reduction in the fiscal year 1980 deficit understates
the degree of fiscal restraint proposed in the budget. The high-employment budget, which measures discretionary changes in fiscal policy, is
projected to shift toward surplus by more than $10 billion between fiscal
years 1979 and 1980. The most severe restraint is expected to occur in
the second and third quarters of fiscal year 1980, when previously legislated social security tax increases and the President's spending curbs
begin to take effect.
The combined deficit--unified plus off-budget--is expected to
be $49 billion in the current fiscal year and $41 billion in fiscal year
1980. The Treasury is expected to finance the fiscal year 1979 deficit
by drawing down its cash balance and by issuing $40 billion in securities
to the public. In fiscal year 1980, the Administration does not plan a
further drawdown in the cash balance; hence, borrowing from the public
is expected to remain about the same as in fiscal year 1979.
Economic Assumptions
The new budget estimates for both fiscal years 1979 and 1980
are based on the assumption (see Table 2) that real GNP grows--fourth
quarter over fourth quarter--by 2.2 per cent during 1979 and 3.2 per
cent during 1980. The unemployment rate is expected to edge up to
6.2 per cent at the end of calendar year 1979, and to remain there through
1980. The average rate of inflation--as measured by the GNP deflator--is
projected by the Administration to be 7.4 per cent in the final quarter of
1979 and 6.4 per cent in the final quarter of 1980. These economic assumptions are somewhat more optimistic than those advanced by a number of private forecasters.

Prepared by Kevin Riper, Research Assistant, Government Finance Section,
Division of Research and Statistics.

A - 2

Table 1
Selected Measures of the Federal Budget
for Recent Fiscal Years
(Billions of dollars)
1977
Unified Budget
Receipts
Outlays
Deficit (-)
Off-Budget Outlays
Confined Federal Deficit (-)

1978

1979e

1980e

357.8
402.8
-45.0

402.0
450.8
-48.8

456.0
493.4
-37.4

502.6
531.6
-29.0

8.7

10.3

12.0

-53.7

-59.1

-49.4

-41.0

365.3
412.0
-46.7

413.8
450.6
-36.8

464.3
496.3
-32.0

513.8
539.2
-25.4

417
448
-31

469
492
-23

521
529

NIA Budget 1/
Receipts
Expenditures

Deficit (-)
High-Employment Budget 2/
Receipts
Expenditures
Deficit (-}

-8

Hemo:
Per Cent Increase in:
Unified Budget Receipts
Unified Budget Outlays

19.3
9.9-

12.4
11.9

13.4
9.4

10.2
7.7

VIA Budget Receipts
NIA Budget Outlays

16.4
10.9

13.3
9.4

12.2
10.1

10.7
8.6

Estimated.
Federal budget measured on the National Income and Product Accounts basis.
NIPA receipts and outlays for the economy at a 5.1 per cent unemployment
rate.

A -3

Table 2
Economic Assumptions in the Budget
(Calendar years; dollar amounts in billions)

1978
GNP:
Current dollars:
Amount
Per cent change, year over year
Per cent change, fourth over fourth
Constant (1972) dollars:
Amount
Per cent change, year over year
Per cent change, fourth over fourth

Forecast
1979

1980

2,106
11.6
12.7

2,343
11.3
9.8

2,565
9.5
9.8

1,384
3.9
4.0

1,430
3.3
2.2

1,466
2.5
3.2

175.0

Price level:
GNP implicit price deflator:

Level (1972 - 100), annual average

152.1

163.9

Per cent change, year over year

7.4

7.7

6.8

Per cent change, fourth over fourth

8.4

7.4

6.4

6.0

6.2

Unemployment rate:
Total, annual average

A-

Receipts
There are few major new initiatives on the receipts side
of the President's budget aside from the President's real wage
insurance proposal. The Administration's insurance proposal is
designed to increase compliance with the President's wage standard
and thereby reduce inflationary pressures. Under the proposal,
certain groups of employees whose compensation increases from
October 1978 to October 1979 are within the guidelines would be eligible for a tax credit on their 1979 income tax returns, if the rate
of inflation exceeds 7 per cent. Such workers would receive a tax
credit (as a per cent of wages up to $20,000) equal to the difference
between the percentage increase in the Consumer Price Index and 7 per
cent. The maximum tax credit is 3 per cent even if the inflation
rate exceeds 10 per cent. Given the Administration's assumed inflation rate of 7.5 per cent, the cost of the program is estimated by
the Administration at $2.5 billion. Most of this amount would appear
as a reduction in individual taxes, and $0.2 billion would be a

cash grant to those wage earners whose real wage insurance credit
exceeds their tax liabilities.
A small increase in railroad retirement taxes and an oil
pollution levy also are proposed by the Administration. This
recommendation would add $0.3 billion to receipts in fiscal year
1980. Thus, the President's tax initiatives would reduce revenues
by a net $2.0 billion from the current services level of $504.5
billion (see Table 3). The resulting $502.6 billion in fiscal 1980
receipts represents an increase of 10.2 per cent over the previous
fiscal year. Receipts are expected to amount to 20.1 per cent of
projected GNP, compared to the 19.9 rate expected for fiscal year
1979.
Outlays
The rate of growth of Federal spending is

expected to decline

from the current fiscal year's 9.4 per cent pace to 7.7 per cent in
fiscal year 1980. This is the smallest percentage increase since
fiscal year 1973, as Table 4 shows. Federal spending as a percentage
of GNP is scheduled to continue its decline from 22.6 per cent in
fiscal year 1976 to an estimated 21.6 per cent by fiscal year 1979
and 21.2 per cent in fiscal year 1980.
In real terms, the Administration's budget proposes growth
in fiscal year 1980 expenditures of 0.7 per cent, as compared with
3.9 per cent in fiscal year 1978. Total spending for national

A-5

Table 3
Effects of Administration Proposals on Receipts
(billions of dollars)
Fiscal Year 1980
Current services receipts estimates
Real wage insurance

504.5
-2.3

Increase in railroad retirement payroll tax

Oil pollution liability and compensation

Total proposed changes
Proposed receipts, President's budget

-2.0
502.6

A-

Table 4
Comparative Changes in Federal Outlays
Fiscal Years 1970-1980
Fiscal

Change in Out:lays
from Previous Fisical Year
Per Cent
$
() billions)

Fiscal
Year

Unified Budge
et
Outlays
($ billions:

1970

196.6

12.1

6.6

20.5

1971

211.4

14.8

7.5

20.7

1972

232.0

20.6

9.7

20.9

1973

247.1

15.1

6.5

20.0

1974

269.6

22.5

9.1

19.8

1975

326.2

56.6

21.0

22.4

1976

366.4

40.2

12.3

22.6

1977

402.8

36.4

1978

450.8

48.0

11.9

22.1

1979-

493.4

42.6

9.4

21.6

1980

531.6

38.2

7.7

21.2

7.81/

Unified Budget
Outlays as a
Per Cent of GNP

22.0

I1 Takes into account the Transition Quarter (August-September 1976).

e/ Estimated.

A-

defense is projected to grow at a 3 per cent rate in real terms in
fiscal year 1980, in line with the President's May 1977 pledge to
NATO members. Similarly, payments to individuals are expected to
register a gain of 4.3 per cent in real terms. Offsetting these
increases is a sharp decline of 7.0 per cent in real nondefense
purchases and grants to states and localities.
The Administration's budget outlays may be examined in terms
of current service expenditures, that is, spending that would occur
if all Federal programs were carried on as currently legislated and
if there were no new policy initiatives. The Administration's estimate
of "current services" takes into account inflation adjustments that
are mandatory under current law or that reflect a Congressional
intent to cover costs; the estimates also allow for such items as
expected changes in the number of beneficiaries in Federal programs.
In other instances, the OMB estimate does not adjust its spending
programs for inflation. In fiscal year 1980, the Administration
projects the current services outlay total at $536.1 billion, up
$44.8 billion, or 9.1 per cent from fiscal year 1979. If OMB were
to adjust all spending programs for the extra cost of inflation, then
the current service or policy outlays would be $544 billion.
Proposed Expenditure Increases From Current Service Levels
In order to achieve his goal of a 3 per cent rise in real
defense outlays in fiscal year 1980, the President has asked for
across-the-board program increases of $2.2 billion above the current
services level. This increase emphasizes procurement, research
and development. These recommendations are expected to push fiscal
year 1980 defense outlays to $125.8 billion, 9.9 per cent up from a
projected $114.5 billion in fiscal year 1979.
Similarly, fiscal year 1980 outlays for income security
are budgeted to rise 12.7 per cent to $179.1 billion from an
estimated $158.9 billion in fiscal year 1979. Proposed increases
from current services spending levels also include $0.7 billion for
less stringent food stamp eligibility requirements, $0.2 billion
for the real wage insurance program, $0.4 billion for improved
medicaid health care to children and pregnant women, and $0.3 billion
for more effective educational services for children of low income
families (see Table 5).
Other budget requests for funding in excess of current
services projections include: $0.3 billion for a greater U. S.

A-

Table 5
Differences Between Administration's Fiscal Year 1980 Budget
Request and Current Services Levels
(billions of dollars)
Fiscal Year 1980
Current Services Estimate
Proposed Increases (Total)
National Defense (excluding pay)
Food Stamps
Real Wage Insurance
Health Services (Medicaid)
Elementary and Secondary Education
Multilateral Development Banks
National Development Bank
Veteran's Compensation
All Other
Proposed Decreases (Total)
Cap on Federal Pay Raises (civilian and military)
Public Service Employment
Summer Jobs
Impact Aid
Medicare and Medicaid
Social Security
Veteran's Benefits
Agricultural Price Supports (CCC)
Strategic Petroleum Reserve
Railroads
Education
All Other
Predident's Request (Total)

536.1
7.0
2.2
.7
.2
.4
.3
.3
.2
.5
2.2
-11.5
-3.0
-.5
-.3
-.2
-1.7
-.7

-. 4
-2.9
531.6

A-

contribution to multilateral development banks; $0.2 billion for the
National Development Bank, part of the President's urban initiative;
and $0.5 billion for a 7.8 per cent increase in veteran's compensation benefits. In all, the budget for fiscal year 1980 proposes
$7.0 billion in spending increases relative to current service levels,
as shown in Table 5.
Proposed Expenditure Reductions From Current Service Levels
The largest spending cut from current services results
from a 5.5 per cent limit on pay raises for all Federal employees-military and civilian--instead of the 10.25 per cent pay raise that
would occur under present law. This is expected to save $3.0 billion
in 1980.
In the grants category, the Administration proposes
reduced spending of $0.5 billion as countercyclical public service
employment jobs are cut from 625,000 at the end of fiscal year 1979
to 467,000 at the end of fiscal year 1980. In addition, $0.3 billion
is cut from the summer jobs program for economically disadvantaged
youths and $0.2 billion is cut from impact aid.
The Administration also will ask Congress for three pieces
of legislation which would cut current services outlays in fiscal
year 1980: (1) hospital cost containment, which, if passed,
presumably would reduce Medicare and Medicaid spending by $1.7 billion;
(2) Social Security program changes which would eliminate the $255
lump sum burial payment, phase out benefits for students 18 to 21 and
tighten eligibility requirements under the disability program (total
estimated savings $0.7 billion); (3) reform in the veteran's program
which would tighten eligibility requirements for certain medical care
reimbursements and educational benefits (estimated savings $0.3 billion).
Other reductions in current services spending levels are anticipated
for agricultural price supports ($0.7 billion), strategic petroleum
reserve ($0.3 billion), railroads ($0.5 billion), and education ($0.4
billion).
The proposed decreases total $11.5 billion but these
reductions are offset by the $7 billion in proposed increases
described earlier. The net change is a decrease of $4.5 billion
and this yields the President's final spending proposal of $531.6
billion in fiscal year 1980.
(See Table 5).
The Administration's success in attaining the goals set
forth in this budget will depend as much on prevailing economic
conditions as on programmatic decisions within the Administration's
control. A higher-than-expected unemployment rate, for example, would

A - 10

automatically trigger greater outlays for unemployment insurance.
Rapid increases in the price level would imply greater spending for
those programs indexed for inflation such as social security benefits.
(On the other hand, higher nominal incomes would increase receipts,
as inflation pushes wage earners into higher tax brackets.)
In addition, continued high interest rates would result in
higher than estimated interest outlays. It should be noted that OMB
has changed its estimating assumptions for interest rates. Until
recently, the interest rate assumed throughout the forecast period
was the same as the interest rate prevailing at the time estimates
were made. Starting with this budget, however, the interest outlay
projection rests on the assumption that the 91-day bill rate will
decline in conformance with reductions in the rate of inflation. The

average level of the bill rate in calendar year 1979 is assumed to
be 8.8 per cent and to be 7.6 per cent in calendar year 1980. Had
the old method been used, fiscal year 1980 interest outlays would
have been $2.0 billion higher than the figure presented in this year's
budget.

B- 1
APPENDIX B*
NEW ESTIMATES OF THE HIGH EMPLOYMENT BUDGET SURPLUS/DEFICIT
The high employment budget surplus/deficit (HES/D)
presents estimates of the Federal government budget surplus or
deficit (NIPA basis) that would be recorded if the economy were
operating at its potential level of output. The official estimates of potential output--made by the Council of Economic
Advisers--have recently been revised and these new estimates
have been incorporated into our estimates, and projections,
of the HES/D.
The subsequent discussion (1) explains the nature of
the revision in the estimates of potential GNP, (2) briefly
describes how the HES/D is calculated, and (3) compares the staff's
new and old estimates of the level and change in the HES/D.
Revision in Estimates of Potential GNP by Council
Potential GNP is defined as the level of real output
that the economy could produce at high rates of resource utilization. The Council of Economic Advisers has revised its estimates
of GNP and the (full employment) unemployment rate associated
with it. 1/ Potential real GNP is now estimated to have grown
at a 3 per cent annual rate since 1973; this compares with the
previous estimate of about 3-1/2 per cent over the preceding
five years. (See Table 1.) With the downward revision in the
growth of potential GNP, the level of potential GNP was also
revised down somewhat.
In determining what is a high level of
resource utilization, the Council has raised its estimate of
the full employment unemployment rate--for 1978 and 1979--from
4.9 per cent to 5.1 per cent.
The slowing in the rate of productivity growth in
recent years, particularly in both 1977 and 1978, was the primary factor responsible for the revisions in high employment
potential GNP. An important--but not sole--contributor to the
lower rate of productivity growth has been the slowdown in

The Annual Report of the Council of Economic Advisers,
pp. 72-76.

Prepared by Darrel Cohen, Economist, Government Finance
Section.

- 2

capital investment relative to the expansion of the labor force.
Because of this experience, the estimated potential rate of growth
of productivity for the 1973 to 1978 period has been revised downward from over 1.5 per cent to around 1 per cent a year--about
equal to the average rate of increase since 1973. The underlying
growth rate of the labor force is still estimated to have been
2-1/2 per cent per year, and the workweek to have declined 0.5
per cent per year. Taken together these components of potential
growth yield growth in potential GNP of 3 per cent per year for
the 1973 to 1978 period. This same rate of growth is projected
to hold during the next few years (1978-1983), as a projected.
fall in labor force growth is estimated to be offset by a pickup
of productivity growth.

Calculating and Interpreting the HES/D
The HES/D is an attempt tormeasure discretionary fiscal
activity alone. It has long been recognized that the actual
Federal surplus or deficit is not a satisfactory measure of discretionary fiscal policy; because changes in revenues and, to
some extent, expenditures reflect not only new policy initiatives
but also the impact of economic fluctuations on the budget. The
HES/D seeks to abstract from the influence of such fluctuations
by estimating what the budget position would be if there were no
business cycle, and if the economy were growing along a path of
relatively full capacity output. Given such estimates of the
level of the HES/D, one can determine the degree of discretionary
fiscal restraint or stimulus over a period by examining changes

in the HES/D.

A positive change (or increase) in the HES/D is

normally an indication of fiscal restraint while a negative
change (or decrease) is an indication of fiscal stimulus.
The method employed by the staff and most other analysts
to estimate the high employment budget is rather straight forward.
High employment receipts are estimated by (1) defining a high
employment rate of resource utilization and calculating the hypothetical level of real GNP consistent with that rate, (2) computing nominal potential GNP by multiplying real potential GNP
by the rate of inflation observed or assumed in the actual

B-3
economy 2/, (3) estimating three income components of nominal
potential GNP--corporate profits, personal income, and wages and
salaries, and (4) applying the appropriate tax rates on these
income components in order to derive the high employment NIPA
receipts estimate. The difference between the receipts that
result from the high employment potential output and actual
receipts measures the effect of economic fluctuations on tax
collections.
Estimating high employment expenditures is somewhat
less complicated. It is assumed that only unemployment compensation.responds to changes in the level of economic activity, 3/
and thus, high employment expenditures simply equal actual (or
budgeted) expenditures adjusted for cyclically related unemployment compensation.

The Staff's Estimate of the HES/D
The new potential GNP estimates result in lower
potential tax receipts, and a reduction in both the level and
the change in the high employment surplus. A comparison of the
new and old estimates of the HES/D for fiscal years 1974-1980
is found in Table 2. 4/

This inflation assumption obviously is crude and should be
kept in mind by the user of the data.
3/ This assumption may not be realistic given that the foodstamp program, veteran's benefits, social security payments,
and public assistance grants also respond to changes in the

level of economic activity.

These items are not included in

the expenditures adjustment due to the difficulty of separating cyclically related increases in spending from their

normal program growth.
4/

It should be noted that the new estimates of the HES/D for

fiscal years 1979 and 1980 found in Table 2 differ from the
estimates found in Part 1 of the Greenbook.

This is because

the estimates in Table 2 allow only for the changes in potential GNP whereas the estimates in Part 1 allow for other

changes in fiscal policy assumptions as well.

The difference in the new and old estimates of the high
employment surplus is $1.3 billion in fiscal year 1974; almost
$23 billion in fiscal year 1980. The new estimates fall increasingly short of the old ones because of the lowering of the growth
rate of potential GNP. For the same reason, the difference between
the new and old estimates of the change in the HES/D grows over
time, although in not nearly so pronounced a way.
As discussed earlier, the change in the HES/D is much
better than the level as a measure of discretionary fiscal policy.
Examination of the changes in the HES/D shows that both the new
and old estimates yield a qualitatively identical view of the
stance of fiscal policy. For example, both estimates show that
fiscal policy was expansionary in fiscal years 1975 and 1976.
Fiscal restraint was indicated in fiscal years 1977 and 1978,
while increasing restraint is shown through 1980.

APPENDIX B
Table 1
COMPARISON OF OLD AND NEW POTENTIAL GNP ESTIMATES
(Billions of dollars, except as noted)
Old High
Employment
Benchmark
Unemployment
rate (%)

New High
Employment
Benchmark
Unemployment
rate (%)

1974

4.8

5.0

1,249.8

1,243.9

3.5

3.0

1975

4.8

5.1

1,294.1

1,281.2

3.5

3.0

1976

4.8

5.1

1,340.0

1,319.6

3.5

3.0

1977

4.8

5.1

1,399.7

1,369.3

3.5

3.0

1978

4.9

5.1

1,449.4

1,410.3

3.5

3.0

1979

4.9

5.1

1,500.8

1,452.7

3.5

3.0

1980

4.8

5.0

1,554

1,496

3.5

3.0

Fiscal Year

Source:

Real Potential GNP
Old
New

% Growth in
Real Potential
GNP
Old
New

Council of Economic Advisers and Economic Report of the President,
January 1979.

APPENDIX B
Table 2
HIGH
FRB
THE
EMPLOYMENT SURPLUS/DEFICIT (HES/D)
(Billions of dollars)
Fiscal Year

Old 1/

HES/D
New

Change in HES/D
Old 1/

1974
1975

-3.0

-7.9

1976

-14.5

-19.8

-14.7

1977

-3.0

-11.8

11.5

1978

5.2

-7.2

1979

16.8

1980
1/

8.1

37.8

New

6.8

-. 4
15.0

8.2

-9.8
-16.8
8.0
4.6

11.6

6.8

21.0

15.4

Old estimates are those found in the December,
1978 Greenbook and an extraoplation for 1980.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 6, 1979 : Greenbook Part 2

FRASER