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CONFIDENTIAL (FR)

SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

January 12, 1973

By the Staff
Board of Governors
of the Federal Reserve System

SUPPLEMENTAL NOTES

The Domestic Economy

Industrial production.

Industrial production rose 0.8

percent further in December and at 119.3 percent was 10.4 percent
above a year earlier.

As in recent previous months the gains in output

were widespread among consumer goods, business equipment, and materials,
Production of defense and space equipment, however, continued unchanged.
(Very confidential until release Monday afternoon.)

INDUSTRIAL PRODUCTION
(1967= 100, seasonally adjusted)
1971
Dec.
Total index

Percent change from
Percent change from

r.Oct.

1972
p.Nov.

e.Dec.

108.1

117.3

118.4

119.3

.8

Consumer goods

118.0

125.5

126.7

127.9

.9

8.4

Business equip.
Defense equip.

98.0
75.6

108.3
78.5

109.0
79.4

110.4

1.3

12.7
5.0

108.4
83.1

120.0
114.1

120.6
114.4

121.1
115.6

.4
1.0

11.7
39.1

7.3

19.8

Materials
Steel
Auto
assemblies*

A year ago
10.4

79.4

10.3
8.6
9.1
9.6
*Seasonally adjusted annual rate, millions of units.
Retail sales.

Nov. to Dec.

The advance retail sales estimate for December

indicated the sales advance from November was a modest 0.3 percent.
a quarterly basis, however, the three month period was strong with a
gain for all types of stores of 3.4 percent, with a.4.8 percent gain

On

- 2-

for durables and a 2.7 percent advance for nondurables.

Compared with

a year earlier, sales in December were up 11.6 percent; the final
quarter of 1972 was 10.9 percent higher than a year ago.

RETAIL SALES
(Percentage change from previous period)
1972
II Q

III Q

IV Q

All retail stores

3.3

2.6

Durable
Auto
Furniture &
appliance

4.2
6.4

Oct.

3.4

3.6

-

3.9
4.6

4.8
4.7

2.0

2.9
3.6
2.7

GAF
Total, less auto &
nonconsumer items

Dec.

Nov.
.7

.3

4.4
4.7

.7
.1

.4
1.7

3.9

5.5

.8

1.9
1.7
2.6

2.7
1.7
1.6

3.2
2.5
3.4

-1.4
- .3
-3.2

.2
-2.0
- .4

2.4

1.9

2.5

4.3

-2.7

-

2.9

1.9

2.9

3.3

-1.1

.1

1.6
2.7
Real*
*Deflated by SA all commodities CPI.

n.a.

3.6

-1.1

n.a.

Nondurable
Food
General merchandise

Inventories.

- .5

In November,

-1.6

.6

book value of retail trade

inventories rose at the fastest pace in more than a year, accelerating
at automotive and other durable goods outlets.

The change in total

manufacturing and trade inventories was at a $17.5 billion rate, surpassing the October rate of $14.6 billion and the third quarter average
rate of $13.3 billion.

-3CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)

Nov.

1972

Q III

(Rev.)

Oct.

Nov.
(Prel.)

8.7

13.3

14.6

17.5

4.2
3.3
.9

7.7

Q II
Manufacturing and trade
Manufacturing,
Durable
Nondurable

total

6.8
6.0
.9

6.1
5.3
.9

Trade, total
4.5
7.8
5.5
Wholesale
1.9
4.5
4.1
Retail
2.6
3.3
1.5
Durable
.0
-. 2
.8
Automotive
-1.4
-. 2
-.6
Nonautomotive
1.4
.4
1.0
Nondurable
2.7
1.7
2.5
NOTE: Detail may not add to totals because of rounding.

11.3
2.7
8.7
6.7
3.9
2.8
2.0

5.6
2.1

Because of the slight decline in retail sales in November,
the retail inventory-sales ratio increased, but it is still at a
reduced level.

This was offset by the decline in the manufacturing

ratio, and the overall ratio declined further to 1.46, the lowest since
early 1966.

-4-

INVENTORY RATIOS
1971

1972

Oct.

Inventories to unfilled orders:
Durable manufacturing
Homes sold.

1.47

1.46

1.77

1.64

1.60

2.14
1.34

1.92
1.28

1.89
1.23

1.40
1.25
1.49
2.06
1.72
2.58
1.21

Trade, total
Wholesale
Retail
Durable
Automotive
Nonautomotive
Nondurable

1.57

2.20
1.38

Durable
Nondurable

Nov.
(Prel.)

1.82

Manufacturing, total

Oct.
(Rev.)

1.61

Inventories to sales:
Manufacturing & trade

Nov.

1.37
1.24
1.46
2.01
1.65
2.57
1.18

1.31
1.20
1.38
1.80
1.39
2.40
1.17

1.32
1.20
1.41
1.83
1.43
2.41
1.19

.953

.944

.876

.869

Seasonally adjusted sales of new homes by merchant

builders were at an annual rate of 715,000 units in November.

While

the rate was down sharply from the record (although downward revised)
pace for October, the average for the two months combined was nearly
770,000--well above the third quarter average.

Even so, with merchant

builders' stocks of new homes up further, the stocks level turned
upward to 6.3 months'

supply at the October-November rate of sales,

about as high as last June-July.

The median price of homes sold in

November held at $28,700, and remained above the still
price of homes for sale.

rising median

(Confidential until Tuesday morning.)

- 5 Existing homes sold in November were at a median price of
$27,180--up seasonally from October and 8 percent above a year earlier.

NEW SINGLE FAMILY HOMES SOLD AND FOR SALE
Homes
Sold 1/

Homes
for Sale 2/

(Thousands of units)

Median price of
Homes for Sale
Homes Sold
(Thousands of dollars)

1971
QIV

682

284

25.5

25.9

QI
QII
QIII (r)

701
686
717

318
355
385

26.2
26.8
27.9

26.1
26.5
27.1

July
August (r)
September (r)
October (r)
November (p)

692
767
755
823
715

361
384
385
394
401

27.7
28.1
28.1
28.7
28.7

26.7
27.0
27.1
27.6
27.8

1972

1/ SAAR.
2/

SA, end of period.

NOTE:

Current and revised data beginning August are Confidential until
Tuesday morning, January 16.

-6The Domestic Financial Situation

Mortgage rates.

The average return on home mortgages remained

virtually stable in December, according to HUD (FHA).

In the primary

market for conventional first mortgages, the contract interest rate on
new and existing home loans remained at 7.70 and 7.75 percent respectively.
In the secondary market, average yields on FHA-insured mortgages edged
down one basis point to 7.56 percent.

(Confidential until January 17.)

AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES
Primary market:
Conventional loans
Spread

Level
(percent)

(basis
points)

Secondary market:
FHA-insured loans
Spread

Level
(percent)

(basis
points)

Discounts
(points)

1971 - Low
High

7.55
7.95

-36
52

7.32
7.97

-27
31

1972 - Low
High

7.55
7.70

15
61

7.45
7.57

5
48

3.7
4.7

7.65
7.65
7.70

27
28
30

7.54
7.55
7.56

16
18
16

4.4
4.5
4.6

July
Aug.
Sept.

NOTE:

2.5e
7.8

19
4.7
7.57
32
7.70
Oct.
4.7
48
7.57
61
7.70
Nov.
4.6
41
7.56
55
7.70
Dec.
FHA series:
interest rates on conventional first mortgages
(excluding additional initial fees and charges) are rounded by
FHA to the nearest 5 basis points.
On FHA loans carrying the
7 percent ceiling rate in effect since mid-February 1971, a
change of 1.0 points in discount is associated with a change of
12 to 14 basis points in yield. Gross yield spread is average

mortgage return, before deducting servicing costs, minus average
yield on new Aaa utility bonds.
e/

Estimated.

- 7-

INTEREST RATES

1972
Highs

Dec.

Lows

18

1973
Jan. 11

Short-Term Rates
Federal funds (wkly.

avg.)

3-month
Treasury bills (bid)
Comm. paper (90-119 day)

5.38 (12/20)
(12/19)

3.18 (3/1)

5.29 (12/13)

5.66 (1/10)

2.99 (2/11)
3.75 (2/29)
3.75 (2/23)
4.62 (3/8)

5.17
5.50
5.50

5.23
5.63

5.94

5.75
5.94

Euro-dollars

5.19
5.63
5.63
6.31

CD's (prime NYC)
Most often quoted new

5.50 (12/27)

3.50 (2/23)

5.25 (12/13)

5.63 (1/10)

5.39 (12/29)
5.63 (12/29)
5.64 (12/29)

3.35 (1/10)
3.88 (3/3)
3.79 (2/17)

5.37
5.50
5.51

5.51
5.63
5.70

5.63 (12/27)

3.88 (2/23)

5.50 (12/13)

5.75 (1/10)

Treasury bills (bid)
Federal agencies

5.55 (9/22)
5.86 (12/26)

3.57 (1/8)
4.32 (1/17)

5.22
5.79

5.49
5.91

CD's (prime NYC)
Most often quoted new
Prime municipals

5.75 (12/27)

4.62 (1/19)

3.20 (12/27)

2.35 (1/12)

5.63
3.10

5.85 (1/10)
3.25

Treasury coupon issues
5-years
20-years

6.32 (9/14)
6.22 (4/14)

5.47 (1/13)
5.71 (11/15)

6.18
6.00

6.85

Corporate
Seasoned Aaa
Baa

7.37 (4/24)
8.29 (1/3)

7.05 (12/7)
7.89 (12/29)

7.10
7.93

7.13
7.89

7.60 (4/21)

7.08 (3/10)

7.21

7.25

Municipal
Bond Buyer Index

5.54 (4/13)

4.99 (1/13)

5.03 (12/14)

5.03

Mortgage--implicit yield
in FNMA auction 1/

7.72 (10/16)

7.54 (3/20)

7.67 (12/11)

7.68

Banker's acceptances

6-month
Treasury bills (bid)
Comm. paper (4-6 mo.)
Federal agencies
CD's (prime NYC)
Most often quoted new

(12/29)

(12/29)
(12/5)

1-year

Intermediate and Long-term

New Issue Aaa Utility

1/

2/

6.31
2/

Yield on short-term forward commitment after allowance for commitment fee
and required purchase and holding of FNMA stock. Assumes discount on 30year loan amortized over 15 years.
This rate now reflects the yield on the Treasury's new 20-year, 6-3/4 per
cent bond that was auctioned on January 4.

- 8 -

International Developments

U.S. foreign trade.

Prices (unit-values) of U.S. exports

rose very sharply in November--about 4 percent higher than in November.
The increase in prices of finished manufactures was particularly large;
smaller increases were reported for foodstuffs (wheat, rice) and for
crude materials.

Prior to November month-to-month price movements in

exports had been relatively small.

For September-November the export

unit-value index for total exports averaged about 5 percent higher than
a year earlier; for finished manufactures the increase was 3-1/2 percent.
Unit-values of total imports rose only slightly in November;
prices of foodstuffs continued to rise but the unit-value index for
finished manufactures changed very little from the relatively high
October level.

However, import unit-values (total and finished manu-

factures) had been steadily moving up throughout 1972.

For September-

November the unit-value index for total imports was about 8-1/2
percent higher than in the year-earlier period; the rise in finished
manufactures was 9-1/2 percent.
Bundesbank raises discount rate.

In its continuing campaign

against inflation, the Bundesbank raised its discount and Lombard rates
by a half a point each, effective January 12, to 5 and 7 percent,
respectively.

It was the fourth time these rates had been increased

since October 8, when the discount rate stood at 3 percent, the Lombard

-9rate at 4 percent.

Rediscount quotas of German commercial banks with

the Bundesbank were reduced by 10 percent, effective April 1. These
quotas had been lowered in December, effective February 1, also by
10 percent.

The Bundesbank described its latest actions as being

directed against "the very marked expansion of credits and of the

volume of money."

CORRECTIONS:
Page I-2, line 4 of Outlook should be: $250 billion in fiscal 1973,
rather than the $252 billion shown in the December Greenbook.

APPENDIX A: RESULTS OF TELEPHONE SURVEY OF COMMERCIAL BANKS
CONCERNING THE IMPACT ON M OF THE RECENT CHANGE IN
1
REGULATION J AND THE IMPLEMENTATION OF REGIONAL
CHECK PROCESSING CENTERS*
Pursuant to the request at the last FOMC meeting, a telephone
survey of selected commercial banks was conducted through the Reserve
Banks in late December and early January to attempt to determine to what
extent, if any, the accelerated growth of M 1 during November and
December might be attributable to the recent change in Regulation J and/
or the concommitant implementation of a number of regional check processing centers (RCPCs). For purposes of investigating a possible
Regulation J effect, approximately 125 large (generally $200 million or
more in total deposits) member banks that formerly remitted to the
Federal Reserve for cash letters on a deferred basis (i.e., that
remitted on the first business day after the day on which the cash
letters were received) were contacted and were asked whether deposit
customers (corporations in particular) had been requested to increase
their balances in order to offset the effects of faster remittance by
the bank for checks drawn on it by its customers. If such requests had
been made and were honored by customers, the banks were asked to provide
a rough estimate of the amount by which this factor had increased their
gross demand deposits since the change in Regulation J took place. With
respect to the effect of RCPCs, Reserve Banks contacted varying numbers
of banks included in new RCPC arrangements and raised similar questions.
In general, the responses to the survey suggest that very
little, if any, of the recent accelerations in M1 growth can be
attributed to the effects of either the change in Regulation J or the
implementation of RCPCs. In all Reserve Districts the response from
all banks contacted was virtually unanimous that deposit customers had
not been requested to increase their balances as a result of the change
in Regulation J.
One exception to the general rule occurred in upstate
New York where a bank indicated it had notified affected customers of
the change in Regulation J and while no specific request was made for
additional balances, the notification statement appeared to carry the
weight of a request and some additional balances evidently were
obtained. Another exception occurred in Idaho, where specific requests
for more funds were tendered, but the bank indicated that thus far they
had elicited little response.

*

Prepared by Anton S. Nissen, Senior Economist, Division of Research
and Statistics.

A-

2

While virtually no commercial banks had requested additional
balances up to the time of the survey, a number did indicate they were
either considering the possibility of so doing or intended to do so,
but that additional time and analysis would be required before any
action could be taken. Thus, it seems at least possible that such
actions may tend to exert some upward influence on M1 growth rates in
the future. It should be noted, however, that banks cited a number of
factors that would militate against higher deposit requests, and these
would tend to limit their importance.
First, of course, part of the need for higher deposit balances
has been offset by the Reserve Banks passing faster credit on some items
presented to them for collection at the same time they are obtaining
faster remittance on items presented by them for payment. In the
aggregate, the amount on which the Reserve Banks are passing faster
credit probably averages slightly more than half of the amount on which
they are obtaining faster remittance, so the offset is not complete.
Second, the general reduction in reserve requirement ratios under
Regulation D also has tended to offset part of the need for higher
balances. In analyzing the profitability of depositors' business, it
appears that banks frequently take into account the maintenance of
reserves against their balances. Thus, the increased profitability
attendant to the general reduction in required reserve ratios tends
partially to offset the effects of losses of funds realized through
faster remittance.
A third factor tending to inhibit requests for higher deposit
balances is the competitive situation among banks. All banks were not
equally affected by the change in Regulation J and to the extent that
some sort of equilibrium existed between competing institutions before
this change, the banks more heavily influenced by the change may be
unable to demand higher balances without losing customers. Finally,
there is the existence of an alternative to higher balances in the form
of increased service charges where accounts have been rendered less
profitable by the Regulation J change.
The survey responses with respect to the impact of RCPCs are
less detailed, but the general view is that the advent of such arrangements also has, at least up to this point, generated few, if any,
requests by banks for higher deposit balances.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102