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CONFIDENTIAL (FR)

January 12, 1977

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS
Retail sales...................................................
Automobile sales.............................................
Personal income................................ ...............
Michigan consumer survey........................ ...............
Conference Board................................ ...............
Business fixed investment...................... ...............
+o
e+
., ++++.o
++
+l
o+++,++
Contracts and orders for plant
and equipment ................................
Commerce surveys...............................
Book value of manufacturing
inventories ................................. ...............
Industrial production........................... ...............
Nonfarm payroll employment...................... ...............
Unemployment rate ............................... ...............
Private housing starts.......................... ...............
State and local government ..................... ...............
Average hourly earnings index..................................
Prices.........................................................

11
11
16
16
16
17

TABLES:
Retail sales..........................
Auto sales............................
. ..... ....
.......
...
Personal income......................
Cyclical changes in real income........
Commitments data for business
fixed investment....................
Survey results of anticipated
plant and equipment expenditures....
Business inventories...................
Inventory ratios......................
Changes in employment..................
Selected unemployment rates........... ..............
New private housing units............. ..............
Hourly earnings index................. ..............
Recent price change................... ..............
..........

..........

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

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

CHART:
Two measures of consumer attitudes.............................

Continued

TABLE OF CONTENTS
Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

...............
...
Money markets..,.............................
Long-term securities markets................................
U.S. government...............................................
State and local governments...................................
Nonfinancial businesses......................................
Monetary aggregates........................................
..
Loan developments..........................................
Business loans.............................................
Mortgage and consumer credit markets........................

6
8
8
10
10
11
16
16
16

TABLES:
Net funds raised by and advanced to nonfinancial
sectors in credit and equity markets

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

Selected financial market quotations.........................
Security offerings................. ..........................
Monetary aggregates .........................................

7
9
13

Commercial bank credit....................................... 15
Interest rates and supply of funds for
conventional home mortgages at selected S&L's.............. 18
18
Secondary home mortgage market activity....................
Consumer instalment credit................................... 21

CHARTS:
Funds raised by selected sectors as a per cent of
total funds raised by all nonfinancial sectors.............. 2
Nonfinancial corporate business-liquid
asset balances.............................................. 5
Households--net increase in credit market borrowing........... 20
INTERNATIONAL DEVELOPMENTS

Foreign exchange markets......................................

U.S. international transactions...............................
...
Merchandise trade....................................

5
5

.......
Nonagricultural exports................................
Agricultural exports..................................... .....
........................
Nonfuel imports.....................
Fuel imports............. .....................................

5
6
6
7

Military & service transactions................................
Current-account balance......................................

7
9

Continued

TABLE OF CONTENTS

Section
INTERNATIONAL DEVELOPMENTS

Page

Bank-reported capital transactions............................
9
New issue of foreign bonds................................... 10
Foreign official assets......... ............................
10

Monetary policy and monetary conditions in
major foreign industrial countries.......................... 11

TABLES:
U.S. merchandise trade--International.accounts basis..........
Price and volume of U.S. nonagricultural exports and
nonfuel imports.......................

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

8
8

3-month and long-term interest rates in selected
industrial countries....................................... 12
Growth of the money stock in selected
industrial countries........................................ 13

January 12, 1977

II - T - 1

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

Release
Date

Data

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

Dec.
Dec.
Dec.
Dec.
Dec.

1-12-77
1-12-77
1-12-77
1-12-77
1-12-77
1-12-77

95.9
7.9
4.6
80.0
19.1
60.9

.11/
8.15.13.9
2.3
4.4

Dec.
Dec.

1-12-77
1-12-77

36.3
5.01

36.21 /
4.991/

36.0:
4.921

36.4;
4.68 1'

Dec.
Nov.

1-12-77
12-29-76

40.1
147.1

40.11 /
5.7

39.71/
8.6

40.31/
3.9

Nov.
Nov.

12-15-76
12-15-76
12-15-76
12-15-76
12-15-76

132.0
138.9
139.3
78.7
133.0

14.7
21.1
25.5
3.1
11.8

6.9
5.9
7.5
1.8
8.0
4.9
.7
5.0
7.6

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

Dec.

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

Nov.
Nov.
Nov.

3.0
7.81
5.0 /
1.9
-.1
2.6

3.0
" 1/
8.3 i
5.0-=
2.8
2.9
2.8

Consumer prices (1967-100)
Food
Commodities except food
Services

Nov.
Nov.
Nov.

12-21-76
12-21-76
12-21-76
12-21-76

173.6
181.9
159.8
184.7

3.5
-2.6
5.3
4.6

Wholesale prices (1967-100)
Industrial commodities
Farm products & foods & feeds

Dec.
Dec.
Dec.

1-12-77
1-12-77
1-12-77

188.6
188.7
185.6

10.9
3.8
31.2

4.7
6.3
-1.2

Nov.

12-16-76 1417.8

12.7

9.0

sonal income ($ billion) 2/

Nov.

(Not at Annual Rates)
1-4-77
1-4-77
1-4-77
1-4-77

52.0
15.8
12.8
3.0

Oct.

1-10-77
1-4-77
1-10-77

1.55
1.66
1.38

Nov.

1-4-77

.642

Retail sales, total ($ bil.)
GAF

Dec.
Dec.

1-10-77
1-10-77

57.4
14.0

3.1
.6

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

Dec.

Dec.
Dec.

1-4-77
1-4-77
1-4-77

10.8
9.3

14.2
17.2
-1.8

1977
1977
1977

1-11-77
1-11-77
1-11-77

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries
Nondefense
Defense
Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade
Ratio:

Mfrs.' durable goods inventories to unfilled orders

Plant & equipment expen.
All industries
Manufacturing
Nonmanufacturing

Nov.
Nov.
Nov.
Nov.

Oct.
Nov.

1.5

3.2
7.9
.9
54.4

17.4
17.0
12.6
41.0

1.51
1.711/
1.38-'

1.501
1.64 '
1.36

1.551
1.72-'
1.391'

.6411/

.634 -

.6151/

1.8
-8.8
-10.5
-.8

11.9

6.5
7.8
13.5
-18.3

13.1
13.6
9.9

($ . b
(5 bil.)-

Housing starts, private (thous.)- ?2/
heding indicators (1967-100)
Actual data. 2/ At Annual rate.

Nov.

134.95
59.58
75.37

12-16-76 1,705
-6.0
12-29-76 127.5
1.0
Planned - Commerce Dec. 1976 Survey.
Nov.

11.3

12.5
10.4
10.9
1
1._n
0.

23.5
A a

- 1

DOMESTIC NONFINANCIAL DEVELOPMENTS
The faster pace of expansion of consumption and income growth
evidenced in November apparently continued in December.

Retail sales

advanced sharply for a third month in a row; payroll employment rose by
a quarter of a million; and industrial production apparently rose
further.

In addition, there are signs that inventory positions are

being brought into better alignment with sales.

However, the reper-

cussions of the protracted earlier pause have apparently led to a
weakening in capital spending.

On the inflation front, retail price

pressures have continued to be somewhat less intense than last summer
and growth of wages remains near the slower rates in evidence since late
1975.

Wholesale prices, however, rose sharply again in December

reflecting higher prices for farm and food products and continued large
increases for industrial commodities except fuel.
Retail sales rose 3 per cent in December, marking the third
consecutive month of gains of 1 per cent or more.

Excluding autos

and nonconsumer items, the December rise was just under 2 per cent.
With the exception of apparel and furniture and appliances, sales gains
were fairly widespread across major types of stores.

Fourth quarter

consumer sales ex autos were about 3-1/4 per cent above the third
quarter average; this is the strongest quarterly gain in over a year
and a half and more than twice the average rise recorded during the
previous half year.

II -

RETAIL SALES
(Per cent change from previous period;
based on seasonally adjusted data)

1976
II
III

1976
Oct.

Nov.

3.2

1.0

1.9

n.a.

0.7

1.7

Dec.a

Total sales

1.9

(Real*)

1.0

Total, less auto and
nonconsumption items

1.3

1.7

3.3

1.3

1.1.

GAF

-.2

2.9

3.9

3.4

3.4
4.5

.2
-. 7

2.8
2.7

.4
-. 3

3.7
4.1

5.2
9.3

2.7

-.2

2.9

3.3

2.9

-3.2

1.2
-3.4
1.2
-.1
.0

1.7
5.7
1.0
3.1
2.3

3.3
.5
2.9
5.1
3.9

1.2
2.1
1.1
3.8
2.1

1.0
-1.8
.7
.6
.6

2.1
-.3
2.8
1.9
2.4

Durable
Auto
Furniture and
appliances
Nondurable
Apparel
Food
General merchandise
Gasoline

1.2
-0.1

3.1
n.a.
1.8
.6

aAdvance, partial sample estimate.
*Deflated by all commodity CPI seasonally adjusted.

AUTO SALES
(Seasonally adjusted, millions of dollars)
1976
Aug.
Sept.

III

10.3

10.2

9.8

10.5

Imports

1.4

1.6

Domestic

8.9

8.6

Large

2.7

Intermed.
Small

Total

Oct.

Nov.

Dec.

10.0

9.5

10.8

1.6

1.8

1.9

1.5

8.3

8.9

8.2

7.6

8.0

9.3

2.2

1.8

1.7

2.2

2.8

2.7

2.6

3.0

2.6

2.8

2.9

3.2

3.4

3.7

3.2

4.0

3.8

3.2

3.0

3.3

II - 3

Unlike the previous two months, the December increase in goods
consumption included a very sizable gain in automobile sales.

Unit sales

of domestic-type autos were at a 9.3 million annual rate, almost 9 per
cent above the third quarter rate and the highest monthly figure since
September 1973.

The December surge reflected to some extent the continued

snapback from the Ford strike, but more important was the improved
availability of the popular GM models.

Trade reports indicate full

size and intermediate-sized cars showed impressive gains, but there
was apparently a more moderate consumer response to rebates for small
cars.

Sales of imports were at a 1.5 million unit annual rate in

December, the same as in the prior month and off almost 9 per cent
from the third quarter sales rate--which benefited from special sales
incentive programs.
Personal income rose by 1.1 per cent in November--the largest
rise since last January--as manufacturing payrolls jumped due both
to the return of striking auto industry workers and an unusually
large increase in average hourly earnings.

Although the fourth quarter

income gain was significantly greater than that recorded in the preceding
three month period, it did not match the gains recorded during the
second half of 1975.

Consumer outlays apparently rose in the fourth

quarter at a pace faster than income and the saving rate is estimated
to have fallen further to about 6 per cent--a rate low by the standards
of the early seventies but near the average recorded in the sixties.

II - 4

PERSONAL INCOME
(Per cent change at annual rate; based on seasonally adjusted data)

July 75-*
Nov. 76

Sept. 76Oct. 76

Oct. 76Nov. 76

Current Dollars
Total Personal Income
Nonagricultural Income

9.9
10.8

9.7
10.5

12.7
12.9

11.1

10.4

13.4

Private

11.7

8.1

14.6

Manufacturing
Government

12.7
9.0

1.5
18.7

22.5
9.2

7.9
8.2

8.4
9.3

11.5
14.2

4.3
5.2

5.5
6.3

9.2
9.4

5.4

6.2

9.9

Wage and Salary Disbursements

Nonwage Income
Transfer Payments
Constant Dollars**
Total Personal Income
Nonagricultural Income
Wage and Salary Disbursements

* July 1975 was the specific low for the deflated wage and salary component.
** Deflated by the CPI, seasonally adjusted.

II - 5
The decline in the saving rate over the second half of 1976
may reflect some recent improvement in consumer confidence.

The

quarterly Michigan consumer survey showed that appraisals about inflation
and unemployment improved substantially and expectations about longer-run
business conditions were more optimistic, although there was a small
dip in the index of sentiment following the strong third quarter gain.
The bimonthly Conference Board index of consumer confidence measured
in late November rose quite sharply to a level just under its first
quarter high.

This survey indicated a very strong improvement in

buying plans for automobiles, homes, and major appliances over the
next six months.
In contrast to the relative optimism characteristic of
consumer expectations, businessmen continued to be cautious, and their
attitudes apparently worsened during the pause.

Business fixed

investment, after rising at a moderate rate in the first three quarters
of last year, appears to have slowed considerably in the fourth
quarter--despite contrary indications by the Commerce November survey.
Shipments of nondefense capital goods and sales of trucks were essentially
unchanged in November and there was only a modest increase in nonresidential construction outlays.
Evidence that this slowdown in capital spending may not be
transitory is found in the slower advance in the second half of 1976
in contracts and orders for plant and equipment.

In November, producers

of nondefense capital goods reported that their bookings dropped 10.5

II - 6
CYCLICAL CHANGES IN REAL INCOME*
(cumulative per cent change; based on seasonally adjusted data)

Personal

Income**
A.

Wage and Salary

Disbursements**

Expansions -- 16 months after trough

Trough = June
June
Apr.
Dec.
Nov.
July

1949
1954
1958
1960
1970
1975

12.2
11.0
7.6
7.9
8.0
5.8

13.7
11.5
10.0
8.5
7.7
7.2

B. Change from Previous Peak
Previous Peak

Trough plus 16 months

Dec. 1948
May 1953

Oct. 1950
Oct. 1955

9.2
9.5

9.9
8.0

Mar. 1957

Aug. 1959

5.6

3.8

July 1960

Apr. 1962

6.8

6.4

Oct. 1969

Mar. 1972

8.3

5.4

Nov. 1973

Nov. 1976

2.4

0.4

* November 1973 was the specific high and July 1975 was the specific low for the
deflated wage and salary component.
** Deflated by the CPI, seasonally adjusted.

TWO MEASURES OF CONSUMER ATTITUDES:
Michigan Survey Research Center (SRC) Index of Consumer
Sentiment (1966 QI = 100) and Conference Board (CB)
Index of Consumer Confidence (1969-1970 = 100)

~I~~
100

CB index of Consumer
Confidence

SRC index of \
Consumer Sentiment

1972

1973

1974

1975

1976

CB index plotted middle of bi-monthly period; SRC index plotted middle
of quarter.

COMMITMENTS DATA FOR BUSINESS FIXED INVESTMENT
(Percentage change from preceding period; based on seasonally adjusted data)

Nov. 75
to
Nov. 76

QII

1976
Sept. Oct.
QIII

8.1
6.6

5.5
4.7

-.8
-2.4

-.6
-1.6

2.0
.7

1.8
1.3

17.4
10.1

6.3
4.7

5.6
4.5

5.8
4.4

6.1
5.2

6.2
5.4

-10.5
-10.8

12.6
6.5

1.4

11.0

-7.0

30.9

4.0

7.0

57.1

-8.6

24.1

-3.8

-9.5

11.1

-9.5

18.3

Nov.

New Orders Received by Manufacturers

Total Durable Goods
Current Dollars
1967 Dollars 1/
Nondefense Capital Goods
Current Dollars
1967 Dollars 1/
Construction Contracts for Commercial
and Manufacturing Building 2/
Current Dollars

Square Feet of Floor Space

Contracts and Orders for Plant & Equip. 3/
Current Dollars

11.7

3.1

3.6

15.1

-13.2

13.0

1972 Dollars 4/

10.4

1.6

-1.1

2.8

14.0

-13.3

7.4

1/ FR deflation by appropriate WPI.

2/ Current Dollar series obtained from FR seasonal.
adjusted by Census.
3/

Contracts and orders for plant and equipment (BCD Series No. 10) is constructed
by adding new orders for nondefense capital goods to the seasonally adjusted
sum of new contracts awarded for commercial and industrial buildings and new
contracts awarded for private nonbuilding (e.g. electric utilities, pipelines,

etc.).
4/

Floor space is seasonally

These series do not yet reflect the December revision in orders data

BCD series No. 20.

II - 9

per cent to a level only fractionally above the level last June.

Although

a good deal of this drop can be attributed to a very sharp decline in
commercial aircraft orders, there was a weakening of machinery orders
as well.

Commercial and industrial construction contracts were also

weak in November as floor space contracted fell 9.5 per cent, almost
erasing the October rebound.
The two most recent Commerce surveys suggest that plant and

equipment outlays may be relatively sluggish for another quarter or two
and then strengthen later on in 1977.

The annual survey, conducted in

December, showed an 11.3 per cent increase for 1977--essentially
consistent with the earlier results of private soundings.

The November

quarterly survey had indicated a very weak first half of 1977.
Business appears to be making significant progress in
bringing inventories into better alignment with sales.

In October,

retailers liquidated inventories but manufacturing stocks grew quite
rapidly in September and October, despite production cutbacks.

However,

- 10

SURVEY RESULTS OF ANTICIPATED PLANT AND EQUIPMENT EXPENDITURES
1977
(Per cent increase from 1976)

McGraw-Hill
Nov.
1976
All Business

Merrill Lynch 1/ Rinfret 2/ Commerce 3/
Oct.
Oct.
Dec.
1976
1976
1976

13.0

13.5

10.0

11.3

15.4

12.2

10.4

12.5

22.6

21.1

17.9

12.2

9.4

5.0

4.5

12.7

11.0

14.6

9.6

10.4

Mining

10.1

20.8

Railroads

18.9

3.2

2.8

10.5

8.3

4.9

8.2

-13.7

Electric Utilities

12.0

14.6

14.8

13.5

Gas Utilities

17.1

2.3

11.4

17.2

Communications

11.0

12.5

9.7

14.4

9.0

20.4

3.4

Manufacturing
Durable
Nondurable
Nonmanufacturing

Nonrail Transportation

Commercial and Other

20.6

11.0

9.5

1/
Confidential results, formerly released under the name of Lionel D. Edie &
Company, Inc.

2/
- Confidential results, formerly released under the name of Rinfret-Boston
Associates, Inc.
3/
-

Corrected for systematic bias.

II - 11

in November, the book value of manufacturing inventories rose at only
a $2.9 billion annual rate compared with $21 billion in October and
an average of $15.4 billion during the third quarter.

While liquidation

of nondurable stocks occurred for the first time in a year, the big
adjustment was at durable goods producers where there was a $12.5 billion
slowing in the monthly rate of inventory investment.

By stage of

processing, the adjustment was concentrated in finished goods.

The

inventory-sales ratio for durable manufacturing rose sharply in
September and October, but the November slowing in accumulation
dropped this ratio to about its first quarter level.

The ratio in

nondurable manufacturing was off a bit in November to a level still
above the average recorded over the first two quarters of the year.
With sales strengthening and manufacturing inventories
little changed in November, industrial production gains probably
continued into December.

Increases in motor vehicles output were

substantial last month--auto assemblies rose 14 per cent to a 10
million unit annual rate as producers made determined efforts to
build stocks of the popular larger cars, and manufacturing employment
increased over the month.

- 12

BUSINESS INVENTORIES
(Change at annual rates in seasonally
adjusted book values, $ billions)

1975
III

Manufacturing and trade

1976
III

Oct.

Nov.

-12.9

8.6

-. 4

23.1

31.5

29.6

21.4

n.a.

-10.0
-2.0
-8.1

-4.2
-7.3
3.1

.6
-4.4
5.0

7.5
1.7
5.8

14.2
6.8
7.5

15.4
6.8
8.6

20.5
17.7
2.8

2.9
5.1
-2.2

Trade, total

-2.8

12.8

-1.0

15.6

17.3

14.2

Wholesale

-2.7

3.1

-2.0

5.1

9.0

4.3

1.5

3.8

Retail

-. 1

9.7

1.0

10.5

8.3

9.9

-2.3

n.a.

Auto

5.9

-. 9

1.1

4.8

-5.6

n.a.

Manufacturing
Durable
Nondurable

n.a.

INVENTORY RATIOS

1974
IV

1975
IV

1976
I

III

Oct.

Nov.

Inventory to sales
Manufacturing and trade
Manufacturing
Durable
Nondurable

1.51
1.71
2.13
1.26

1.57
1.75
2.27
1.22

1.50
1.64
2.07
1.21

1.51
1.63
2.03
1.22.

1.53
1.66
2.04
1.26

1.54
1.71
2.14
1.26

n.a.
1.66
2.06
1.24

Trade, total
Wholesale

.38
L.15

1.38
1.23

1.36
1.20

1.37
1.22

1.38
1.22

1.38
1.23

n.a.
1.23

1.53

1.50

1.47

1.48

1.51

1.49

n.a.

.512

.611

.620

.625

.640

.641

.642

Retail
Inventories to unfilled orders:
Durable manufacruring

II - 13
CHANGES IN EMPLOYMENT
(Average monthly change in thousands; based on seasonally adjusted data)

June 75Apr. 76

Apr. 76Dec. 76

Oct. 76Nov. 76

Nov. 76Dec. 76

257
(254)

118
(113)

233
(125)

257
(230)

Nonfarm Payroll Series
Total
(Strike adjusted)
Construction

-8

-4

Manufacturing
(Strike adjusted)

88
(90)

11
(8)

116
(10)

36
(28)

Durable
Nondurable

48
40

21
-10

116
0

47
-11

Trade

-25

100

Services and Finance

Total Government
State and Local

34
34

17
16

32
28

25
23

290

119

357

222

Household Series
Total

* June 1975 was the specific low for payroll employment.

- 14

SELECTED UNEMPLOYMENT RATES
(seasonally adjusted)

Total, 16 years and older

1973

1974

1975

4.9

5.6

8.5

7.6

Men, 20 years and older
3.2 3.8
Women, 20 years and older 4.8 5.5
Teenagers
14.5 16.0
Household heads
Married men

2.9
2.3

3.3
2.7

6.7
8.0
19.9
5.8
5.2

5.7
7.4
19.4

QII

7.4
5.7
7.1
18.7

1976
QIII
QIV

7.8
6.0
7.6
18.8

8.0

Nov.

Dec.

8.1

7.9

6.3
6.5
7.6 7.7
19.0 19.0

6.2
7.6
18.9

5.0
4.1

4.9
4.1

5.3
4.4

5.4
4.6

5.2
4.3

7.9
7.8

7.3
7.5

7.7
7.6

7.7
7.9

7.8
7.9

7.7
7.9

Total, Alternative Seasonal
Adjustment Methods
All Additive Factors
1975 Factors

- 15

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

1976

1975

Per cent change in
Nv9- 196Nov. from:
Nov.(p) Month ago Year ago

QIV

QII

Permits
Starts
Under constructionCompletions

1.11
1.37
1.04
1.28

1.17
1.40
1.06
1.30

1.13
1.43
1.06
1.33

1.34
1.59
1.11
1.37

1.49
1.81
1.14
1.32

1.59
1.71
n.a.
n.a.

+6
-6
+3*
-5*

+41
+23
+ 8*
+18*

Single-family
Permits
Starts
/
Under constructionCompletions

.81
1.03
.56
.91

.87
1.12
.59
.97

.81
1.09
.61
.99

.89
1.19
.64
1.05

1.00
1.34
.67
.97

1.09
1.24
n.a.
n.a.

+9
-8
+4*
-5*

+33
+18
+20*
+31*

Multifamily
Permits
Starts
1/
Under constructionCompletions

.30
.33
.48
.37

.30
.28
.46
.33

.32
.35
.46
.34

.45
.40
.47
.31

.49
.47
.48
.35

.50
.47
n.a.
n.a.

+1
-1
+2*
-5*

+60
+41
- 5*
- 7*

.23

.27

.24

.27

.24

-9

+ 6

QIII(r)

Oct.(r)

All Units

Memo:
Mobile home shipments

*
1/

Per cent changes based on October data.
Seasonally adjusted, end of period.
NOTE:

Per cent changes are based on unrounded data.
cent is indicated by --.

A change of less than 1 per

- 16

Nonfarm payroll employment rose 230,000 (strike-adjusted)
in December, following a November increase of about 125,000.
were concentrated in the service-producing industries.

Gains

Adjusted

for strike activity, manufacturing employment rose by about 30,000 in
December after remaining essentially unchanged between April and November.
Payroll employment was up by 2.2 million from December 1975, with
about one-fourth of the gain in manufacturing.

Following a rebound

in November from strike-affected levels, the factory workweek remained
unchanged in December at 40.1 hours.

The unemployment rate, seasonally adjusted, receded to 7.9
per cent in December from 8.1 per cent in November and 8.3 per cent in
December 1975.

The drop reflects an unchanged civilian labor force

and an increase of 220,000 in total employment.
the jobless situation was concentrated among men

The improvement in
aged 25 years and over.

Private housing starts declined 6 per cent further in November
but were still 7-1/2 per cent above the third quarter rate; permits
on the other hand, rose in November.

The fourth quarter average for

total starts was probably a 1.7 million annual rate--the highest
figure in three years.
It appears that more than half of the fourth quarter increase
in total starts was in the still depressed multifamily sector--where
acceleration of starts under HUD programs accounted for nearly all
of this gain.

Single-family starts also rose in the fourth quarter,

probably averaging close to 1-1/4 million units--only 7 per cent

- 17

below the previous cyclical peak in 1973.

The high level of these

starts reflects favorable mortgage market conditions and strong demand
for home-ownership as evidenced by the high level of home sales.

Spending by State and local governments continued to be on
the weak side.

Construction put-in-place fell $1.3 billion in

November--the second consecutive month of sharp decline.

Field

reports indicate that a large part of this weakness was due to unseasonably cold weather that affected many projects in the South and
in the border states.
The average hourly earnings index rose at an annual rate
of 4.8 per cent in December, somewhat slower than over the first 11
months. For 1976, the rate of increase averaged 6.7, down from 7.9
per cent during 1975 and 9.4 per cent for all of 1974.
Prices of all consumer items rose 0.3 per cent in November,
slightly below the increases last summer and fall.

In November,

food prices declined after six months of small or no increase, and
prices of energy items rose at their slow rate since last May.
Excluding prices of these two categories, the November CPI advance
just was under 6 per cent, about the same as the average gain over
the first 10 months of 1976.

- 18

The wholesale price index rose 0.9 per cent in December.
the fourth successive large monthly increase.

The bulk of the rise

occurred in the farm and food products group, while industrial commodities rose only 0.3 per cent as a decline in
offset continued increases elsewhere.

the fuel and power group

Exclusive of energy items,

the industrial commodities index rose 0.5 per cent about the average
rise for 1976 as a whole.

- 19

HOURLY EARNINGS INDEX*
(Per cent change from preceding period, compound annual rate;
based on seasonally adjusted data)

Private Nonfarm
Construction
Manufacturing
Trade
Services
Transportation and
Public Utilities

QII

1976
QIII

QIV

Dec. 75Dec. 76

6.9

6.5

7.1

6.2

6.7

6.6

4.8

5.1
7.4
5.2
8.3

7.6
6.3
5.6
6.6

5.5
9.2
6.9
4.8

4.0
6.2
7.4
7.2

5.4
7.3
6.6
6.7

7.2
7.8
5.7
9.3

5.4
5.4
6.0
6.8

9.1

9.3

6.6

4.4

7.0

5.3

Oct. 76Nov. 76**

Nov. 76Dec. 76**

-1.1

* Excludes the effects of interindustry shifts in employment and fluctuations in
overtime pay in manufacturing.
** Monthly change at an annual rate, not compounded.

- 20

RECENT PRICE CHANGE
(Per cent changes at annual rates; based on seasonally adjusted data)1/

Relative
importance
Dec. 75

Dec. 74
to
Dec. 75

Dec. 75
to
Mar. 76

Mar. 76
to
June 76

June 76
to
Sept. 76

Sept. 76
to
Dec. 76

Nov. 71
to
Dec. 7(

Wholesale Prices
100.0

4.2

-1.8

6.6

4.7

9.0

10.9

Farm and food products

22.8

-0.3

-15.8

18.0

-11.0

7.9

31.9

Industrial commodities
Excluding fuels and
related products
and power
Materials, crude and
intermediate 2/

77.2

6.0

3.2

3.6

9.6

8.9

3.8

66.8

5.1

6.1

3.6

7.6

7.0

6.7

48.1

5.5

3.5

4.3

9.5

10.2

6.6

18.7
11.9

6.7
8.2

0.5
6.8

2.3
3.3

10.1
5.7

6.8
10.0

2.9
8.8

11.1

5.5

-20.5

16.8

-12.2

11.7

28.9

Relative
importance
Dec. 75

Dec. 74
to
Dec. 75

Dec. 75
to
Mar. 76

All commodities

Finished goods
Consumer nonfoods
Producer goods
Memo:
Consumer foods

Mar. 76
to
June 76

June 76
to
Sept. 76

Sept. 76
to
Oct. 76

Oct. 7(
to
Nov. 7(

Consumer Prices
100.0

7.0

2.9

6.1

5.8

4.2

3.5

Food
Commodities (nonfood)
Services

24.7
38.7
36.6

6.5
6.2
8.1

-7.9
2.9
10.6

7.2
5.6
6.2

1.8
6.6
7.1

3.3
4.5
6.6

-2.6
5.3
4.6

Memo:
All items less food and
energy 2/3/
Petroleum products 2/
Gas and electricity

68.1
4.5
2.7

6.7
10.1
14.2

7.7
-15.7
6.4

5.5
9.3
12.1

6.7
15.6
13.6

3.6
13.6
15.5

All items

5.7
9.,8
1.2

/I Not compounded for one-month changes.
2/ Estimated series.
3/ Energy items excluded: gasoline and motor oil, fuel oil and coal, gas and electricity.

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

Indicator

Latest data
Period
Level

Monetary and credit aggregates
Total reserves
December
December
Nonborrowed reserves
Money supply
M1
December
M2
December
M3
December
Time and savings deposits
(Less CDs)
December
CDs (dollar change in billions)
December
Savings flows (S&Ls + MSBs + Credit Unions) December
Bank credit (end of month)
December
Market yields and stock prices
Federal funds
wk. endg.
dg.
"
Treasury bill (90 day)
mmercial paper (90-119 day)
w utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
FNMA auction yield
(FHA/VA)
Dividends/price ratio (Common
stocks)
wk. end g.
NYSE index (12/31/65=50)
end of day

SAAR (per cent)
34.54
34.48

Total of above credits
e - Estimated

1.5
1.7

6.7
7.4

8.3
8.4

311.8
739.3
1235.9

7.7
12.0
12.3

7.2
12.8
13.6

5.8
11.3
13.1

427.5
63.8
496.6
771.3

15.1
1.7
12.7
1.9

17.0
1.4
14.8
7.9

15.7
-19.1
15.9
6.3

Percentage or index points
-.20
4.47
-.70
4.41
.01
-. 66
4.63
-.05
-. 62
7.75
-.18
-.51
5.78
-.18
-. 47
8.46
-.05
-.34

-. 65
-.76
-. 81
-1.13
-1.35
-. 67

1/5/77
1/11/77

3.93
56.34

.02
50.99-

-.01
56.33

-. 06
53.87

Net change or gross offerings
Current month
Year to date

1976

U.S. Treasury (net cash borrowing)

Year
ago

1/5/77
1/5/77
1/5/77
1/7/77
1/6/77
1/10/77

Credit demands

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

Net change from
Month
Three
ago
months ago

1975

1976

1975

-1.4

December
November
October
December

-. 5

1.2
5.4
2.4e

1.3
5.3
1.8

1.3
14.9
48.2
26. 0e

-7.5
5.7
34.2
32.6

December
December

2.3e

2.0
.5
1976
7.8

34.7e
2.9
1977
6.4

30.5

January

m--

1977
6.4
17.2

17.3

134.4

2.3

1976
7.8
105.6

III - 1

DOMESTIC FINANCIAL DEVELOPMENTS
Total funds raised in credit and equity markets by all
nonfinancial sectors increased moderately further in the fourth quarter-again about in line with the rise in GNP.

Although borrowing by the

Federal government continued to decline from the unprecedented rates
reached in 1975, this sector still accounted for an unusually large
share of total funds raised, particularly when compared with similar
stages of previous economic expansions (see chart).

In contrast,

demands for funds by the nonfinancial business sector have remained
quite small relative to the total, as internally-generated funds have
been sufficient to finance over 90 per cent of expenditures for capital
equipment and inventories.

Households became the major borrowing

sector during the last half of 1976, and accounted for more than a
third of total funds raised in the fourth quarter; home mortgages
continued to be the dominant form of household borrowing.
Financial intermediaries have been supplying an increasing
share of total funds raised by the nonfinancial sectors in recent
quarters, as shown in the lower panel of the table.

With inflows of

consumer-type time and savings accounts to banks and nonbank thrift
institutions particularly strong in the fourth quarter, the depositary
institutions accounted for an increased share of total funds advanced
by all financial intermediaries.

III - 2
FUNDS RAISED BY SELECTED SECTORS
AS A PER CENT OF TOTAL FUNDS RAISED
BY ALL NONFINANCIAL SECTORS /
(Quarterly totals at SAAR)
(1960-1976)

U.S. GOVERNMENT
_____T

o
U

P__

11,
'

L -4__,,.

,
__

NONFINANCIRL

'--

____

-..

BUSINESS

HOUSEHOLDS

C I

I I

' I '

'
'I

I '

1 I' II '

I 'I

I '

l' I

72 I73 ' 74 f75 76 '77
'171
68 '69 170
5 '66'67
2 63 6
966
1/ U.S. Government, business, household, state and local government, and
foreign sectors.
Source: Flow of Funds accounts. Data for 1976-Q 4 are preliminary.

III -

NET FUNDS RAISED BY AND ADVANCED TO NONFINANCIAL
SECTORS IN CREDIT AND EQUITY MARKETS
(Billions of dollars, SAAR)

1975

1976

H22/

Funds raised and advanced

184.2

236.5

242.0

259.0

Funds raised by:
U.S. government
State and local govts.
Foreign

80.8
13.8
8.6

89.6
15.9
17.3

73.8
16.7
15.7

72.0
20.6
15.6

42.0
49.1
-17.4
10.3

53.3
43.2
0.5
9.6

62.9
41.4
8.2
13.3

63.0
43.4
10.3
9.3

39.0
34.6
4.4

60.4
46.2
14.2

72.8
53.6
19.2

87.8
63.9
23.9

23.9
18.0

25.3
3.4

21.5
17.6

22.3
16.1

34.2
12.4
17.9
3.9

65.2
11.8
32.9
20.5

59.9
14.8
32.9
12.2

36.3
18.8
- 0.9
18.4

108.3
68.6
39.7

142.3
93.5
48.8

143.1
85.5
57.6

184.4
127.5
56.9

Nonfinancial business
Long-term debt 1/
Short-term debt
Equities
Households
Mortgages
Other
Funds advanced by:
U.S. govt. related 2/
Foreign
Private domestic nonfinancial
State and local govts.
Households
Business
Private financial institutions 3/
Depositary institutions 4/
Other financial

Bonds and mortgages.

U.S.

Net of funds raised in credit and equity markets.

Commercial banks,
credit unions.

Preliminary.

government, federally-sponsored agencies and Federal Reserve System.

mutual savings banks,

savings and loan associations, and

III - 4

In association with ample credit supplies relative to
demands, market interest rates generally declined through year-end.
In the primary mortgage market, however, yield indices remained quite

stable, although downward pressures on such rates intensified.

Most

short-term rates by year-end were at or near levels last seen in 1972,
while most long-term rates had reached their lowest levels in three

years.

Moreover, as market rates fell further below ceiling rates

on deposits of comparable maturity in the fourth quarter, deposit rate
cutting by banks and nonbank thrift institutions became more widespread.
In the latest two weeks, however, market rates generally
have backed up somewhat, due primarily to a revision in interest rate
expectations.

Primary home mortgage rates, on the other hand,

declined moderately in early January.
Both businesses and households have continued to restructure
their balance sheets by lengthening the maturity of their outstanding
debt and by adding large amounts to their holdings of financial
assets.

However, as shown in the chart, liquid asset balances of

nonfinancial corporations--when adjusted for price changes--are only
slightly above levels reached four years ago.

Moreover, in terms of

purchasing power, household net worth is still well below levels
reached during most of the 1967-1973 period, and has not increased
since the first quarter of last year, partly reflecting the relative
stability of stock prices.

III - 5
NONFINANCIAL CORPORATE BUSINESS - LIQUIO ASSET BALANCES
(Billions of dollar, NSA levels)
1.
C1960-197-6
T

*
CURRENT OIL LIRS
CONSTqNT de LLFARS

I---.-

*
I S

Z
I

I
' III 677 I16811I 69I I 70
II I 61
I ll'
I196U
66
62 1t63 6 64 165 I Sl

Y
731 ' 74 ' '75

I
72
71 11

HOUSEHOLD SECTOR - FINANCIAL NET
(Billions of dollars, NSA levels)
(1960-1976)

196

'.0

.' ^^ /^~~^'

61 3

I II

6G
'

1 1 '

;

761
76 1 77 '

WORTH 1/
p

76'

1/ Total financial assets less total liabilities.
Flow of Funds accounts. Data for 1976-Q4 are preliminary.
Source:

III - 6
Money Markets
At the time of the December FOMC meeting, which immediately
followed announcement of a reduction in reserve requirements, shortterm market interest rates had fallen to levels that suggested market
anticipations of further reductions in the Systems Federal funds rate
target.

Since that time, however, continued Federal funds trading

around 4-5/8 per cent, improvements in incoming financial and economic
data, and indications that fiscal stimulus to the economy by the new
administration now seems more likely, have caused market participants
to reassess their fund rate expectations.

Treasury bill rates have

increased about 30 to 35 basis points since the December meeting,
placing the 3-month bill rate, on a coupon equivalent basis, above
the Federal funds rate.

Rates in most short-term private markets

have increased somewhat less than on Treasury bills over this period.
Total commercial paper outstanding, seasonally adjusted,
rose sharply during December for the second consecutive month.
Nonfinancial corporate paper climbed by $700 million, while directlyplaced paper of nonbank financial institutions increased $600 million.
The finance subsidiaries of automotive manufacturers, reporting greater
needs for funds to finance dealer inventories, were largely responsible
for the increase in directly-placed paper.

III -

SELECTED FINANCIAL MARKET QUOTATIONS
(One day quotes--in per cent)

Dec. '75
FOMC
Dec. 16

Oct. '76
FOMC
Oct. 19

Nov. '76
FOMC
Nov. 16

Dec. '76
FOMC
Dec. 21
Dec. 28

Federal funds 1 /

5.17

4.97

5.02

4.63

4.66

4.47

4.64 6 /

Treasury bills
3-month
6-month
1-year

5.51
5.94
6.28

4.84
4.95
5.10

4.83
4.95
5.07

4.27
4.47
4.61

4.35
4.52
4.64

4.49
4.63
4.75

4.60
4.80
4.94

5.50
5.88

4.75
5.00

4.88
5.13

4.50
4.63

4.63
4.75

6.10
6.70

4.90
5.10

5.15
5.30

4.60
4.65

4.55
4.65

4.60
4.75

4.75
5.00

6.95

5.53

5.69

5.04

5.01

5.09

7.25

6.75

6.50

6.25

Corporate3/
New AAA
Recently offered4/

9.37
9.25

8.28
8.20

8.24
8.28

7.95
7.97

7.92

7.84

7.75p
7.86p

Municipal
(Bond Buyer)5/

7.34

6.25

6.39

5.95

5.93

5.83

5.78

U.S. Treasury
(Constant Maturity)
5-year
20-year

7.82
8.22

6.60
7.69

6.60
7.67

6.14
7.29

6.16
7.26

6.19
7.22

6.68
7.52

844.30
46.84
82.31
449

949.97
54.18
98.56
569

935.34
53.52
98.23
574

978.39
56.17
104.32
642

1000.08
57.47
108.09
647

987.87
57.07
110.30
664

976.65
56.34
110.01
665

Jan. 4

Jan. 11

Short-term

Commercial paper
1-month
3-month
2/
Large neg. CD's
3-month
6-month

Federal agencies
1-year
Bank prime rate
Intermediate

and Long-term

Stock prices
Dow-Jones Industrial
N.Y.S.E. Composite
AMEX
Keefe Bank Stock

Daily average for statement week.

2/
3/
4/

Highest quoted new issues.
Average for preceding week.
One day quotes for preceding Friday.

5/ One day quotes for preceding Thursday.
6/

Average for first 6 days of statement week ending January 12.
n.a. -- not available
p - preliminary

III - 8

Longer-Term Securities Markets
While yields on intermediate-term Treasury coupon issues
have risen even more than bill yields since the last FOMC meeting,
yields on longer-term public and private securities have registered
somewhat smaller increases, on balance.

An apparent abundance of

funds in the hands of major long-term investors has helped moderate
movements in bond yields.

Additional support has been provided by

security dealers, whose inventories of Treasury coupon issues have
remained near the high levels reached in late December.
U.S. Government.

The Treasury has raised $2.5 billion of

new funds since the December FOMC meeting through the auction of
5-year 1-month notes.

With tax receipts in December somewhat larger

than expected, the Treasury's cash balance at the end of 1976
totaled $11.7 billion--about $1 billion more than anticipated at the
time of the December Greenbook.

Also, the staff is projecting

first-quarter marketable borrowing of $20 to 22 billion.

Under

this assumption, the Treasury would end the first quarter with a
cash balance of around $10 billion--still a high level, but probably
necessary to cover comfortably seasonal cash drains prior to the
April tax date.

III - 9

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

1976
QIV e/
QIIIe/
Gross offerings

Nov.e/

Dec.e/

Jan.

4,666

3,495

4,284

3,100

5,100

5,200

4,800

2,499

1,568

2,100

1,200

2,450

3,200

3,000

1,354
1,145

700
868

792
1,308

525
675

600
1,850

720
1,055
724

575
515
478

735
865
500

825
325
50

530
1,270
650

Privately placed bonds

1,055

1,293

1,467

1,200

Stocks

1,112

634

717

Corporate securities-Total
Publicly offered bonds
By quality 1/
Aaa and Aa
Less than Aa 2/

1977
f/ Feb.f/

By type of borrower
Utility
Industrial
Other

2,000

1,200

1,000

700

650

800

928

702

812

1,366

720

Publicly offered 3/

530

422

598

1,310

250

300

Privately placed

398

280

214

470

5,032
2,886
2,146

4,416
2,735
1,681

4,257
3,040
1,190

4,420
3,250
1,170

3,550
2,350
1,200

4,200
3,200
1,000

4,100
3,000
1,100

Foreign securities--total

State and local gov't
securities
Total
Long-term
Short-term

Net offerings
U.S. Treasury
Sponsored Federal
agencies

e/
f/
1/
2/
3/

5,128

5,215

4,669

6,623

6,053

5,500

10,500

207

383

165

-420

192

245

140

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

III - 10

State and local governments.

Yields on long-term tax

exempt securities have changed little on balance since the December
meeting.1/ December's $2.35 billion of long-term municipal bond offerings brought the 1976 total to approximately $34.7 billion--14 per
cent larger than the previous record high of 1975.

However, short-

term financing was down from the year earlier, and total financing
in the municipal market during 1976 was about $56 billion, approximately
6 per cent less than in 1975.
The relatively lowtax-exempt interest rates in the final
quarter of 1976 allowed State and local governments to refund outstanding

high-cost issues, to reduce further their dependence on the short-

term market, and to accelerate long-term offerings scheduled for
later dates.

Recent announcements indicate that these trends will

continue at least into early 1977.
Nonfinancial businesses.

Corporate bond yields increased

somewhat in early January, rising about 5 basis points above the
levels reached around the time of the last FOMC meeting.

Gross issues

of publicly offered bonds by domestic corporations in December totaled
$2.45 billion, more than twice the reduced November pace.

As in

other recent months, relatively few prime-rated bonds were brought to
market, but a number of lower-rated (less than Aa) industrial and
1/ A compositional change in the Bond Buyer index in the first week
of January caused a decline of about 5 basis points in the average.

III - 11

finance company offerings
were

accelerated or enlarged.

In addition,

it is estimated that private placement takedowns, most of which are
for lower-rated corporations, were a record in December.l /
January's corporate bond calendar is expected to be approximately $3.2 billion.

A number of highly-regarded industrial corpora-

tions have scheduled bond offerings due to the relatively attractive
levels of current yields.

In addition, several utility companies

have announced their intentions to call or refund coupon obligations
that were issued in late 1969 and 1970 when corporate bond yields
reached then-unprecedented highs.

Five-year call and refunding pro-

tection periods have now expired for these issues, and at current
market yields a large volume (possibly as much as $2.5 billion) are
vulnerable to such action.

January's calendar of gross offerings

includes about $215 million of advance refundings.
Stock market prices have changed little, on balance, since
the December FOMC meeting.

New offerings of common and preferred

stocks were $650 million in December, a continuation of the relatively
light new issue volume that characterized the second half of 1976.
Monetary Aggregates
After showing no change in November, M1 expanded at a
7.7 per cent seasonally adjusted annual rate in December, continuing

Seasonal factors ordinarily account for large private placements
in December.

III -

the saw-toothed monthly pattern that has been quite pronounced over
the September to December period.

M1 growth from the fourth quarter

of 1975 to the fourth quarter of 1976 was 5.4 per cent, somewhat
higher than the rate of increase registered in the two previous years.
The pickup in M1 growth occurred despite increased use of close M
substitutes--most importantly NOW accounts and business savings
accounts--which are estimated to have held down the expansion in 1976
by roughly 1-1/2 percentage points.
Due to the rebound in M1 and continued rapid growth of
savings and time deposits at commercial banks, M2 increased in December
at a 12 per cent rate.

Fueled by a record expansion of savings

deposits, M2 grew 10.9 per cent over the year.

Even after excluding

business and State and local government deposits, which increased
rapidly, the growth of savings deposits in 1976 was at a record pace.
Much of this strength can be attributed to the low level of short-term
market interest rates relative to deposit rates at banks.
Net deposit flows to the nonbank thrift institutions
slowed slightly in December, as deposit balances at mutual savings
banks and S&L's taken together expanded at an annual rate of 12-1/2
per cent.

As a consequence, growth of M3 picked up only slightly

in December.

However, M3 expanded more rapidly in 1976--12.8 per cent--

than it had in any of the previous three years.

III - 13
MONETARY AGGREGATES1/
(Seasonally Adjusted Changes)

QIV

QIII

Nov.

Dec.

Nov.-Dec. Year2/

Per Cent at Annual Rates
M 1 (currency plus
demand deposits)

5.6

4.1

6.0

0.0

7.7

3.9

10.4

9.2

12.2

10.3

12.0

11.2

10.9

thrift institutions)

11.8

11.6

13.9

11.5

12.3

12.0

12.8

Adjusted bank credit proxy

2.4

3.8

8.3

13.2

10.1

11.7

4.3

6.3

7.1

12.0

15.6

17.6

16.8

8.1

14.1

13.2

16.7

17.9

15.1

16.6

15.2

13.4
12.7
26.0

27.1
8.2
29.1

26.2
10.2
33.1

28.0
3.7
3.2

27.4
7.0
18.2

24.5

15.5

16.5

18.2

14.8

14.5 e

14.8

9.7

12.2

12.1

10.0

16.6

16.0

18.0

17.3

8 . 4e
14.7 e

M 2 (M1 plus time deposits
at commercial banks
other than large CDs)

5.4

M 3 (M2 plus deposits at

Time and savings
deposits at CBs
a. Total
b. Other than large

negotiable CDs

1. Savings deposits
25.Z
2. Time deposits
2/ 5.4
3. Small time deposits9.5

8.1
19.7

Deposits at nonbank thrift
institutions
a. Savings and loans
b. Mutual savings banks
c. Credit unions

.2e

16.1 e

17.3 e
11.3
17. 7 e

Billions of Dollars
(Average monthly changes, seasonally adjusted)

Memoranda:
a. Total U.S. Government
deposits
b. Negotiable CDs

c. Nondeposit sources of funds

0.4

-2.1
0.0

-1.0

-0.4

-3.4

-1.9

0.2

-2.7

0.5

0.1

1.7

0.9

-1.6

-0.1

0.3

0.1

1.1

1/ Year, half-year, and quarterly growth rates are based on quarterly average data.
2/ Small time deposits are total time deposits (excluding savings) less all large
time deposits, negotiable and nonnegotiable.
e
Estimated.

III - 14

After declining for most of 1976, outstanding negotiable CD's
at commercial banks showed little change in November and then rose
sharply in December--by $1.7 billion.

About one-third of this increase

reflected issues of long-term CD's by two large New York City banks,
but much of the growth was concentrated late in the month and appears to
have been motivated by year-end window dressing considerations.
Despite reductions in offering rates by many institutions
in the fourth quarter, yields available at depositary institutions
were apparently still above yields on U.S. Government securities with
similar maturities.

Consequently, the rapid expansion in time and

savings deposits at banks and nonbank thrift institutions continued
through year-end.

Initially, rate cutting at thrift institutions

was more prevalent in longer-term certificate accounts, while that
at banks was concentrated in time certificates maturing in 2-1/2 years
or less.

However, since the mid-November System survey of changes

in deposit terms, reports in the financial press indicate that more
banks and thrift institutions were reducing rates and that these actions
were beginning to affect rates payable on savings deposits as well.1 /
1/ As yet there are only scattered reports of cuts in rates payable on
savings deposits, and some of the reductions have been limited to
certain classes of depositors. By year-end, two very large banks on
the West Coast had reduced, or were about to reduce, the rates
offered on public savings deposits, and one of these banks announced
a reduction in the rate it would pay on business savings deposits.
Also, a number of smaller banks around the country were reported to
have taken similar actions, and some of these banks cut rates on all
savings deposits.

III -

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

1976
H IOQ
QIII
QIV

ct.

Nov.

Dec. Nov-Dec

Year

Total loans and
investments 2/

4.9

7.0

7.9

12.2

9.4

1.9

5.7

Treasury securities

36.8

0.0

10.6

-6.4

10.3

28.0

19.3

Other securities

-1.0

8.3

6.3

3.3

22.0

-6.4

7.7

3.2

1.6

8.0

7.8

18.2

5.7

-0.5

2.6

4.8

-4.9

3.5

9.4

18.6

12.9

-3.4

4.7

0.7

Real estate loans

8.0

6.0

8.1

6.7

7-5

10.0

8.8

7.7

Consumer loans

4.9

11.3

n.a.

8.9

7.5

n.a.

a. Business loans less
bankers acceptances

-3.5

0.5

5.9

16.2

5.6

-4.1

0.7

-0.2

b. Business loans less
bankers acceptances
plus nonfinancial
commercial paper

-0.3

-2.2

7.0

14.5

5.8

0.6

3.2

1.0

c. Business loans
(including bankers
acceptances) plus
nonfinancial
commercial paper-

-1.7

0.6

10.3

16.7

12.7

1.3

7.0

1.9

Total loansBusiness loans

6.3
21.5

Memoranda:

1/ Last-Wednesday-of-month series except for June and December, which are
adjusted to the last business day of Lne month.
2/ Includes outstanding amounts of loans reported as sold outright to banks
to their own foreign branches, nonconsolidated nonbank affiliates of the
bank holding companies (if not a bank), and nonconsolidated nonbank
subsidiaries of holding companies.
3/ Nonfinancial commercial paper is measured from end-of-month to end-of-month.
n.a.-not available

III - 16

Loan Developments
Business loans.

Acquisitions of Treasury securities and

mortgages accounted for most of the modest expansion in total bank
credit in December, as outstanding bank loans to business edged off
following sizable increases in October and November.

1/For the

quarter as a whole, business loans grew at an annual rate of more than
9 per cent, but one-third of this increase reflected bank acquisitions
of acceptances for tax purposes.

Excluding acceptances, business loans

had expanded sharply in October, but increased in November-December
at less than a 1 per cent rate.

The increase in business loans earlier

in the quarter, and the subsequent drop-off, may be related to the rapid
rate of inventory accumulation in manufacturing which more recently
appears to have been brought closer into line with final sales.
Mortgage and consumer credit markets.
lending apparently remained strong in December.

Total mortgage
Net mortgage

acquisitions by S&L's in the October-November period were 5 per cent
above the record pace of the third quarter, and S&L mortgage commitments
outstanding rose $1 billion in November to a new high of $24.5 billion.
Issues of GNMA-guaranteed securities remained large through December,
and the fourth quarter average was one-fourth above the record third
quarter rate.

Moreover, net mortgage lending by commercial banks

1/ In 1974 and 1975, business loans contracted on a seasonally adjusted
basis in December, while surrounding months showed growth. With
December 1976 showing the same pattern, it appears that the weakness
in business loans may be partly due to poor seasonal adjustment. On
the other hand, if last year's pattern holds, recently-acquired
acceptances will be allowed to mature without replacement, moderating
the growth of business loans in the early months of 1977.

III - 17

also increased further in the fourth quarter.

These three sources

accounted for more than four-fifths of the total net increase in
mortgage debt in the third quarter of 1976.
Average rates on new commitments for conventional home
mortgages in the primary market declined 8 basis points in early
January, after remaining virtually unchanged for almost two months.
In the secondary market, yields on conventional home mortgages have
edged down on balance since the last FOMC meeting and in the more
sensitive FHA/VA market have continued to move about in line with
bond yields--declining through year-end and backing up most recently.1/
Despite recent movements, the spreads between primary conventional
mortgage rates and both bond rates and secondary market rates for
FHA/VA loans have widened considerably since the second quarter of
last year.
The relative stability of rates on conventional mortgages
has reflected in part limited sensitivity of diversified lenders to
recent increases in spreads between yields on conventional mortgages
2/ although commercial and mutual
and other investment alternatives;2/
savings banks stepped up their mortgage lending in the fourth quarter,
they still provided only a relatively modest share of total mortgage
funds in that period.

Moreover, extremely strong demands for home

1/ Development of the market for GNMA-guaranteed securities backed by pools
of FHA/VA mortgages has tightened the relationship between bond rates
and secondary market yields on Government-underwritten mortgages.
2/ The limited reaction in the supply of funds to the conventional mortgage
market at a time when other rates were falling is also due in part to
the relatively underdeveloped secondary market for conventional loans.

III - 18

INTEREST RATES AND SUPPLY OF FUNDS FOR
CONVENTIONAL HOME MORTGAGES
AT SELECTED S&Ls

Average rate on
new commitments
for 80% loans
(Per cent)

End of period

Basis point
change from
month or
week earlier

Spread1/
(basis
points)

Per cent of S&Ls
with funds in
short supply

1976--High
Low

9.10
8.70

---

93
-17

11
0

June
July
Aug.

8.90
8.98
9.00

+12
+ 8
+ 2

+20
+26
+53

6
7
7

Sept.
Oct.

8.97
8.90

- 3
- 7

+74
+61

9
8

Nov.

8.80

-10

+75

8.80
8.80
8.80

0
0
0

+85
+87
+85

2
3
3

Dec.

3
10
17
24

8.78

- 2

8.78

+93

8.70

- 8

+95

n.a.

1977--Jan.

Average mortgage rate minus average yield on new issues of Aaa utility bonds.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Govt.-underwritten
Conventional

1976--High
Low

Dec.

1977--Jan.

6
13
20
27
3
10

Amount

Yield
to

millions)

FNMA1/

Yield
to

Amount

millions)

Offered

Accepted

171

121

184

FNMA1/

Yields on GNMA
guaranteed
mortgage backed
securities for

immediate
delivery 2/

Offered

Accepted

9.31

634

321

9.20

8.44

8.80

8.39

7.57

8.89

8.51

8.80

8.39

7.62
7.60
7.57
7.57

133

8.81

386

286

8.46

7.56
7.92

1/ Average gross yields before deducting fee of 38 basis points for mortgage servicing.

Data reflect the average accepted bid yield for home mortgages, assuming a prepayment
period of 12 years for 30-year loans, without special adjustment for FNMA commitment
fees and FNMA stock purchase and holding requirements on 4-month commitments.
Mortgage amounts offered by bidders relate to total bids received.
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 - 19

mortgage funds have helped to sustain rates on conventional mortgages.
Indeed, very large amounts of funds have been lent in this market-primarily by the S&L's--at virtually unchanged interest rates, which
are still extremely high by historical standards.
The strong demand for mortgage financing has been associated
not only with a rise in the value of new-home sales, but also with the
record volume of transactions in existing homes.

Mortgage credit, of

course, may be used by households for a variety of purposes, and may
substitute to some extent for short- and intermediate-term consumer
credit.

During recent quarters, as shown in the following chart, the

increase in home mortgage debt of households relative to consumer
credit has been striking.
The growth rate in consumer instalment credit outstanding
receded during November from the comparatively brisk October pace,
slipping below the lower end of the 9 to 11 per cent range that prevailed
since the spring.

Thus, the rate of consumer credit expansion continued

to fall short of the 13 to 15 per cent rates that characterized previous
postwar recoveries.

The moderate pace of credit growth in 1976

reflected in part the pause in durable goods sales growth in the second
and third quarters, and a somewhat smaller than usual rise in the ratio
of credit extensions to retail sales--particularly for autos.

HOUSEHOLDS--NET INCREASE IN CREDIT MARKET BORROWING
(MILLIONSOF
DOLLARS,
SAQR)

SOURCE:

FLOW OF FUNDS AOCC.ODATA FOR

III

- 21

CONSUMER INSTALMENT CREDIT

19761/

Total
Change in outstandings
$ Billions
Per cent
Bank share (%)

Extensions
$ Billions
Bank share (%)
Liquidations ($ billions)

1974

1975

QII

QIII

Oct.

Nov.

9.0
6.1
44.4

6.8
4.4
41.7

16.9
10.5
40.1

16.7
10.0
43.8

18.8
10.9
42.9

14.9
8.6
30.7

160.0
45.4
151.1

163.5
47.2
156.6

182.5
47.2
165.6

186.8
47.9
170.1

192.7
47.4
173.9

189.2
47.5
174.2

7.6
14.2

7.1
12.6

6.3
8.9

5.7
8.0

48.1

54.6

55.8

55.0

55.6

14.0

22.4
32.3

28.5
36.2

36.9

30.7
37.5

11.04
13.20

11.02
13.22

Automobile Credit
Change in outstandings
$ Billions
Per cent
Extensions
$ Billions
New-car loans over 36 mos.
as % of total new-car loans
Commercial banks 2/
Finance companies
New-car finance rate (APR)
Commercial banks
(36 mo. loans)
Finance companies

43.2

23.5

10.97
12.61

11.36
13.11

11.03
13.15

11.07
13.18

Quarterly and monthly dollar figures and related percentage changes are SAAR.
Series was begun in May 1974, with data reported for the mid-month of each quarter.
Figure for 1974 is average of May, August, and November.

U.S. International Transactions
(In millions of dollars, seasonally adjusted 1/)

January 11, 1977

IV - T - 1

2
3.

012

erchandise exports
erchandise imports
Trade Balance

107,088

26,836

28,428

29,581

9,754

9,646

98,058
9.030

28,510
-1.674

29,771
-1.343

32,614
-3.033

10,654
-900

10,710
-1.064

Bank-reported private capital flows
Claims on foreigners (increase -)
Long-term
Short-term
(of which on commercial banks in
offshore centers 2/)

-12,840
-13,487
-2,373
-11,114

-2,960
-3,637
-291
-3,346

-1,246
-4,764
-385
-4,379

-1,607
-3,341
-989
-2,352

1,716
-764
-140
-624

-4,081
-3,519
-266
-3,253

(-7,212) (-3,603) (-2,393)

(-2,258)

(-209)

(-2,226)

Liabilities to foreigners (increase +)
Long-term
Short-term
to commercial banks abroad
(of which to commercial banks in
offshore centers 3/)
to other private foreigners
to int'l and regional organizations
Foreign private net purchases (+) of
U.S. Treasury securities
Other private securities transactions (net)
Foreign net purchases (+) of U.S. corp.
securities
(of which stocks)
U.S. net purchases (-) of foreign securities
(new foreign issues on bonds and notes)
Change in foreign official assets in the U.S.
OPEC countries (increase +)
(of which U.S. corporate stocks)
Other countries (increase +)
hange in U.S. reserve assets (increase -)
Other transactions and statistical discrepancy
(net payments (-))
Other current account items
Military transactions, net 4/
Receipt of income on U.S. assets abroad
Payment of income on foreign assets in U.S.
Other services, net
Remittances and pensions
U.S. Gov't grants 4/
Other capital account items
U.S. Gov't capital, net claims 4/ (increase -)
U.S. direct investment abroad (increase -)
Foreign direct investment in U.S. (increase +)
Nonbank-reported capital, net claims
(increase -)
40.

Statistical discrepancy

MEMO:
41. Current account balance
42. Official settlements balance
43.

1976
Q3

1975
YEAR

O/S bal. excluding OPEC

Oct.

Nov.

647

677

3,518

1,734

2,480

-562

-300
947

-91
768

-25
3,543

66
1,668

171
2,309

-3
-559

-666

1,077

2,220

1,957

2,466

-1,546

(1,798)
1,549
64

(-227)
155
-464

(1,205)
468
855

(299)
905
-1,194

(3,156)
-128
-29

(-2,071)
979
8

2.667

453

-598

3.020

538

-3.701

-1,430

-2.729

-350

-517

20
(-225)
-370
(-402)

-121
(-110)
-396
(-434)

-1.226

77
131
1,030
2,505
(-31)
(102)
(943)
(3,054)
-2,806
-1,357
-2,460
-6,206
(-7,168) (-2,830) (-1,622) (-3,011)
5.211
5,940
(1,643)
-729

2.329
2,230
-(555)
99

-607

-773

240
2,667
-883
18,219
-12,212
2,163
-1,727
-2,893
-6,952
-1,731
-6,307
2,437
-1,351

1.272
1,228
(374)
44

842
44
(130)
798

919
-65
(62)
984

-1.578

-407

-81

-431

4,055
1,614
-5
5,495
-3,216
458
-483
-635

2,681
2,159
-146
5,594
-3,134
765
-452
-468

3,484
1,977
366
5,797
-3,085
824
-464
-1,461

-2,414
798
-1,757
-728

-1,202
-212
-202
422

49
301
-1,245
784

-1,210

209

-727

3.310
2,737
(591)
573

-1,246

4,636

4,525

4,855

1,724

1,458

11,697
-4,604

-60
-1,556

816
-1,732

-1,056
-865

n.a.
-761

n.a.
-488

1,336

674

1,005

363

-717

-553

NOTES:
1/ Only trade and services, U.S. Govt. grants and U.S. Govt. capital are seasonally adjusted.
2/ Offshore centers are United Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and
Bermuda).
epresents mainly liabilities of U.S. Banks to their foreign branches in offshore centers which are the
nited Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and Bermuda).
4/ Excludes prepayments for military purchases.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.

In the four week period since the

last green book the trade-weighted value of the dollar initially declined
about 1.2 per cent, then recovered 0.7 per cent -- probably in response
to changing expectations about interest rate differentials between the
U.S. and foreign currencies.

Also the British pound, Canadian dollar,

and Mexican peso continued to recover from their recent weakness, and the
mark rose against its partner currencies in the snake.
Since reaching a record low of $1.57 in late October, the pound
has risen about 9 per cent to the $1.71 level, with about 2 per cent of
this rise occurring during the last month.

In addition the Bank of England

was able to reduce gradually its Minimum
Lending Rate 3/4 percentage point to 14 per cent.

The pound has been

bolstered recently by a series of favorable developments:

a) on December 15

the U.K. government announced a new economic stabilization program; b)
on December 22 the Group of Ten countries and Switzerland agreed to lend
the IMF almost $3 billion through the General Arrangements to Borrow
to help finance the Fund's loan to Britain; c) on January 3 the IMF formally
approved the $3.9 billion loan to the U.K., and d) on January 10 an agreement to offset reductions in official sterling balances was announced by
the Bank for International Settlements.
Under the terms of the IMF loan, the U.K. drew about $1.15
billion on January 7, and will be eligible to draw another $1.1 billion
during 1977

and the final $1.6 billion in 1978.

The agreement on official

IV-

sterling balances involves an undertaking to seek an orderly reduction
in the reserve role of sterling, in part through the offer of mediumterm foreign-currency-denominated bonds by the United Kingdom to official
holders in exchange for their present sterling balances.

In addition

the BIS will provide a $3 billion stand-by credit to the U.K. to finance
any other reductions of official sterling holdings.

To the extent that

the BIS cannot finance from its own resources drawings by the United
Kingdom, it can call upon a back up facility provided by the United States
and other countries; the U.S. share will be $1 billion.

The Managing

Director of the IMF will assist in the implementation of the sterling
balance agreement, which is linked to the conditions of the IMF loan to
the United Kingdom.
During the past month the Canadian dollar has continued to recover
from the sharp November decline that was associated with the election
victory of the French Separatist Party in Quebec.

From a low of about

97 U.S. cents in late November the Canadian currency has appreciated about
2 per cent, half of which occurred during the last four weeks.

On December 24, the Italian monetary authorities announced a
reduction in their tax on the purchase of foreign exchange from 7 per
cent to 3-1/2 per cent.

In addition they announced that the tax would

be further reduced at a rate of 1/2 per cent per week till it is completely terminated on February 18.

The lira had been very strong during

the nine weeks that the tax was at the 7 per cent level,
. Following

IV - 3
the announcement of the gradual reduction of the foreign exchange tax,
the lira came under some downward pressure,
. After about
a week, however, the lira stabilized,

After reaching a low of about 3.6 U.S.

cents on November 22

when the Bank of Mexico prohibited commercial banks from dealing in foreign
exchange, the peso recovered to about 5 cents after the inauguration of
incoming President Lopez Portillo on December 1. During the last four
weeks the peso has stabilized around this 5 cent level, and the spreads
between bid and offer quotations have narrowed from about 2 per cent to
1/2 per cent.

On December 20 the Bank of Mexico again allowed Mexican

banks to trade foreign exchange,

On January 5 and 6 the Belgian and the Netherlands central
banks cut their discount rates by 1 percentage point to 8 and 5 per cent
respectively.

Subsequently the mark rose against these and other currencies

in the European joint float, and the German unit is now above the bottom
of the snake for the first time since it was realigned on October 18.

. The
System made purchases of Swiss francs from the Swiss National Bank sufficient

IV - 4

to reduce the Swiss franc swap debt by $60 million to $1.026 billion.
The System also drew and then repaid $15 million on the swap facility
with the Bundesbank.

On net the System sold $39 million equivalent of

marks during the period.
The price of gold declined about $4.00 during the past month
to its present price of $130.45.

On January 10 the IMF began the resti-

tution of 6-1/4 million ounces of gold to its members.
the Fund will hold its sixth gold auction.

On January 26

Beginning in March the auctions

will be held on the first Wednesday of each month, rather than every six
weeks.

IV - 5

U.S. International Transactions.
include:

Major recent developments

(1) an increased trade deficit in November, bringing

the October-November deficit to about the third quarter rate;

(2) a

rise in net receipts from investment income and military sales in
the third quarter, offsetting part of the increase in net payments
for goods;

(3) a reduction in placements of OPEC funds in the U.S.
The U.S. merchandise trade balance in November was a

deficit of $12.8 billion at an annual rate.

For October-November

combined, the United States recorded a deficit of $11.8 billion at
an annual rate, about the same as in the third quarter.

Over the

two months combined, both exports and imports declined slightly as
the pause in

economic recovery continued in

the United States

and abroad.
In January-November 1976, the U.S. trade balance with nonoil LDCs declined by almost $6 billion from the level recorded in
January-November 1975, as these countries continued to adjust to
large current account deficits related to higher oil prices.

Some

LDCs have also cut back imports in 1976 because of lower export

earnings in 1975.

Over the first 11 months of 1976, U.S. imports

from non-oil LDCs rose by 29 per cent while exports fell by 4 per
cent, compared with the same period in 1975.

Non-agricultural exports in October-November fell by
about 1 per cent from the third quarter level as the economic

IV - 6

pause in major industrial countries persisted and as non-oil
LDCs continued to reduce their imports from the U.S.

The volume

of exports was off by about 3-1/2 per cent from the third quarter,
while non-agricultural export prices rose by about 2-1/2 per cent,
about in line with the higher rate of increase in U.S. industrial
prices in general over the last few months.
New export orders for machinery, which account for one
third of non-agricultrual exports, remained flat in October and
November at about the third-quarter level and 25 per cent higher
than in the second quarter.

However, October-November machinery

exports were off by 3 per cent from the third-quarter rate, even
though some increase was expected, given the normal order-delivery
lag of about 3 months.
Agricultural exports in October-November dropped off by
3 per cent from the record third-quarter rate.

Both the volume

and the price of these exports fell in response to the news of
record world grain crops.

Exports of soybeans, corn,barley, and

grain sorghum to the areas of Europe stricken by drought last
summer remained strong.

The volume of wheat exports was down 40

per cent from the same period last year, reflecting the much improved crops in wheat-importing regions, especially the Soviet
Union and India.

On balance, the outlook is for a continued

heavy volume of agricultural exports with little change in prices.
Non-fuel imports declined in October-November.

They

IV - 7
were reduced by the effects of the economic pause in the United States
and a slowdown in car imports from Canada following the SeptemberOctober Ford strike in the United States, which interrupted deliveries
of parts to Canada.

Car imports from Europe and Japan in October-

November picked up slightly from the third-quarter rate as sales
remained relatively strong.
Fuel imports jumped to a record rate of 8.8 million barrels
per day in November after falling to 7.4 million barrels per day in
October.

The average rate of 8.1 million barrels per day in October-

November, while down slightly from the third-quarter rate, was still
high relative to current demand, reflecting additional stockpiling
in anticipation of the OPEC price increase.

The average price of

a barrel of imported oil rose from $12.17 in the third quarter to
$12.25 in October and $12.34 in November.
Third-quarter 1976 military and service transactions
data now available show a $15.6 billion dollar

annual rate)

surplus, up $3.3 billion from the revised second-quarter figure
and up $8.3 billion from the 1975 rate.

Military exports were

$2.3 billion higher (annual rate) in the third quarter than in 1975.
This new higher level is expected to be maintained in the fourth
quarter of 1976 and in 1977.

Third-quarter net investment receipts

also rose substantially, by more than $4.8 billion at an annual
rate over the 1975 level.

Higher income receipts from U.S. direct

IV - 8
U.S. Merchandise Trade-International Accounts Basis
(billions of dollars, seasonally adjusted annual rates)
1975

1 9 7 6
Oct. &
Nov.

Year

2Qr

EXPORTS
Agric.
Nonagric

107.1

107.3
21.3
86.1

113.7
23.4
90.3

118.3

IMPORTS
Fuels
Nonfuels

98.1

114.0
31.8
82.3

119.1
36.5
82.6

130.5
40.1
90.4

128.2

28.5
69.5

BALANCE

499.0

-6.7

-5.4

-12.1

-11.8

22.2
84.8

25.4
93.0

116.4
24.5

Sept.

Oct.

Nov.

118.3

117.0
28.3
88.8

115.8

25.2
93.0

91.9
39.7
88.5

20.8

95.0

131.8
38.5
93.3

127.8
36.2
91.6

128.5

-13.5

-10.8

-12.8

43.2
85.3

A.I

NOTE:

Details may not add to totals because of rounding.

Imports
Exoorts and Non-Fuel
Price and Volume of U.S. Non-agricultural
----

(Tndex Numbers,1973=100)
1 9 7 6
1975
Oct. &
Year

Nov.

Sept.

Oct.

153.9
112.9

157.7
108.9

156.5
111.1

157.4
105.4

158.0
112.3

144.1
102.0

145.0
99.3

145.1
104.6

145.1
102.8

144.9
95.8

114.1
110.1

150.3
107.0

152.4
110.8

140.9

138.6
96.6

141.7
94.8

Nov.

NONAG.
EXPORTS
Price
Volume
NONFUEL
IMPORTS
Price
Volume

80.2

IV - 9

investment abroad, mainly due to increased earnings of oil companies, accounted for over half the growth in net investment income.
The current-account balance for the third quarter of 1976
showed a deficit of $4.2 billion at an annual rate, after a surplus
of $3.3 billion in the second quarter.

U.S. Government grants to

Israelwere bunched in the third quarter rather than spread evenly
between the first, second, and third quarters because of an initial
Presidential veto of enabling legislation.

Assuming an even use

of these grants throughout the year, the third-quarter current account deficit was inflated by about $2 billion and the secondquarter surplus overstated by about $1 billion at an annual rate.
Bank-reported capital transactions data show a net outflow of $4.1 billion in November.

After correcting for the bias

introduced by temporary weekend transactions, the outflow is reduced to about $2.1 billion.

For October-November, a $2.4 billion

net outflow was recorded, mostly connected with transfers of funds
from head offices of U.S. banks to their Caribbean branches, where
they financed an expansion of both loans to non-banks and interbank
placements.

Data for October and November from the overseas branches

of U.S. banks suggest a sizable refinancing of maturing credits to
nonbank foreigners, likely involving takedowns on several large
Eurocredit facilities arranged for a number of non-oil LDCs.

IV - 10
New issues of foreign bonds in the United States were
about the yearly average of $2.5 billion per quarter in the fourth
quarter of 1976.

Planned foreign bond issues in January-February

are about $1 billion, $900 million of which are new Canadian issues.
New foreign bond issues are probably being delayed by a heavy volume
of new U.S. corporate bonds early in 1977 and higher spreads currently facing Canadian borrowers.
Foreign official assets in the United States increased
by about $900 million in November and by about $1.8 billion in October
and November combined.

OEC official reserve holdings in the United

States fell slightly in October-November, as several non-Middle East
OPEC nations ran down their reserves in the United States at a rate
which more than offset the increases recorded by the other OPEC nations.

Monetary policy and monetary conditions in major foreign
industrial countries.

No major shifts in the direction of domestic

monetary policy occurred in major foreign countries in the oast three
months.

Authorities in the United Kingdom and Italy did adopt some new

measures, but these were essentially additional means of implementing the
restrictive policies that high inflation rates and consequent exchangemarket pressure had induced them to adopt earlier.

Similarly, French

authorities maintained their restrictive policies.

In Canada, Germany,

and Switzerland monetary policy actions continued to be directed toward
hitting the target for monetary growth that each country had announced
previously.

In the countries participating with Germany in the EC snake,

earlier exchange-maret pressure subsided following the realignment of
the snake in October; as anticipated, interest rates have been allowed
tr decline from their extraordinarily high levels,especially in Belgium
and the Netherlands.

No changes in

the direction of domestic monetary

policy were made in Japan.
The lack

of policy initiatives in recent months reflects, in

addition to uncertainty about the outlook for economic activity, the
absence of serious exchange-market disruptions which had induced sharp
policy responses in previous periods.

The Canadian dollar is the only

currency, among the major industrial countries, to have come under
pronounced pressure, and the Bank of Canada, as usual, chose not to adjust
policy to affect the exchange rate.
The development of interest rates and the monetary aggregates
in selected countries is shown in the tables below.

Against a background

3-MONTH AND LONG-TERM INTEREST RATES
IN SELECTED INDUSTRIAL COUNTRIES
(Per cent per annum)

High
3-MONTH RATES 1/
Belgium
Canada
France
Germany
Italy
Japan
Netherlands
Switzerland
United Kingdom

United States

Low

15.00 (Sept.)
10.38 (Mar.)
11.25 (czt.)
5.00 (:sec.)
20.88 (July)
8.25 (Jan.)

6.13 (Jan.)
8.00 (Dec.)
6.00 (Jan.)
3.40 (Hay)

16.00 (Aug.)
2.63 (Jan.)
16.25 (Oct.)

2.63 (Mar.)

5.75 (June)

7.50 (Jan.)
7.25 (May)
0.75 (June)
8.31 (Feb.)
4.50 (Dec.)

1976
Sept.*

Cct.*

Nov.*

---Dec.*

Latest

(1/11)

13.90
9.40

13.94
9.34

12.48
9.08

10.73
8.51

9.53
4.57
16.83
7.50

10.39

4.76

10.41
4.61

10.55
4.82

10.00 (1/12)
4.80 (1/12)

18.61

17.76

12.67
1.40

10.23

8.00
8.22
2.12

17.13
8.00
6.51

15.75 (1/12)

7.50

12.11

14.57
5.03

5.25

1.80

8.25

8.13

(1/11)

14.75

14.27

7.50 (1/12)
6.13 (1/11)
1.25 (1/12)
14.06 (1/11)

4.87

4.54

4.50 (1/5)

1.98

LONG-TERM GOV'T.
BOND YIELDS 2/
Belgium
Canada
France
Germany
Italy

9.30 (Nov.)
9.49 (Jan.)
10.72 (Dec.)

8.80 (Jan.)
8.47 (Dec.)
9.89 (Feb.)

7.74 (Jan.)
14.54 (Cct.)

6.26 (Dec.)
11.40 (Jan.)
8.61 (Feb.)

Japan

8.80 (Hcv.)

Netherlands
Switzerland
United Kingdom
United States

9.76 (Sept.)

7.00 (Feb.)

5.86 (Jan.)

4.41 (Nov.)

15.51 (Oct.)

12.84 (Feb.)
7.26 (Dec.)

8.17 (May)

9.11

9.16
10.43
7.00

13.49
8.77

9.17
9.09
!0.67

9.30
8.82
10.70

n.a.
8.47
10.72

6.93

6.39

6.44

4.52

14.09
8.80
7.98

13.92

9.76

8.77
8.37

4.89
14.76

15.36

7.77

7.74

4.60

4.41
14.65
7.51

8.73
7.43
4.42
13.82
7.27

9.30 (11/30)
8.47 (12/29)
10.72 (12/31)
6.27 (1/7)

(12/31)
(12/31)
(12/31)
(12/31)
(1/7)
7.52 (1/11)

13.92
8.73
7.43
4.42
13.40

'1-'-~------* The 3-month rates shown are the average of daily rates in the month; long-term yields are end-month quotations.
/ Interban7: rates, except: Belgium-time deposit r ate; Canada-finance company rate; Japan - rate on paper of
2-month or greater maturity; U.S. - 90-day CD rate (most often quoted).
2/ The long-term rates nuoted are all government bo nd yields (mostly composite yields). For the United States,
the 20-year constant maturity bond yield is quoted.

IV -

GROWTH OF THE MONEY STOCK
IN SELECTED INDUSTRIAL COUNTRIES
(Percentage change; SAAR)

Average change
during latest
3 months
Canada M1

Average change
during previous
3 months

2.2
11.3

13.0
15.4

Change in
latest 3 months
from same period
year earlier

Latest
Month

4.2
16.2

Nov.

13.7
16.2

Oct.
Oct.

Oct.

France M1

7.6
10.4

Germany M1

4.7
13.1
13.3

6.8
12.6
10.5

9.7
11.4

15.4
12.8

16.2
15.1

Nov.
Nov.

6.4

1.9

9.0

Oct.

United Kingdom M1
M2

7.2
15.8

16.1
17.1

14.1
13.0

Nov.
Nov.

United States M1

4.5
12.0

4.9
10.3

Nov.

M2 1/

8.2
9.1

7.5
8.9
9.4

Switzerland M1 2 /

3.8
8.6

1/ "Central Bank Money," which
sum of
equals aa weighted
weighted sume
which approximately
approximately equals
of the
the
components of M3.
2/ Swiss data are not seasonally adjusted.

Nov.
Nov.
Nov.

Nov.

IV - 14
of declining U.S. rates, short-term interest rates abroad have tended to
fall since the third quarter of 1976.

While short-term rates in France,

Germany, Japan, and the United Kingdom now are as high or higher than
they were at the end of September, they are below the peaks reached
during the fourth quarter.

In all countries except the United States

short-term rates are currently above their 1976 lows.

Long-term yields

have declined in Canada, Germany, the Netherlands, Switzerland, the
United Kingdomand Japan, and have risen in Italy, and France, and
Belgium.

The money stock in recent months has grown more slowly than in

previous months in Canada, Japan and the United Kingdom, but has grown
more rapidly in Germany and Switzerland; in France, M1 has grown more
slowly and M 2 more rapidly.
On December 15, British Chancellor of the Exchequer Denis
Healey announced, in his Letter of Intent to the IMF, that (1) public
spending plans and the public sector borrowing requirement for the next
two years will be cut, and (2) that domestic credit expansion (DCE) will
be limited to £9 billion in the year ending April 20, 1977 and to £7.7
billion in the subsequent year.

DCE comprises all lending in sterling

by British banks, net lending by nonresidents to the British public
sector, and the change in nonbank holdings of notes and coins.
The DCE target implies a rate of growth of M 3 of about 12 per
cent in the current fiscal year (about 10-1/2 per cent if one excludes
residents' foreign-currency deposits).

This is the same growth rate

envisioned by the Chancellor in his budget statement last July, and,
therefore, represents no significant change in the already-restrictive
stance of monetary policy.

That policy is being implemented in part by

IV - 15

limits, announced in mid-November, on the growth of the banks' interestbearing liabilities (the "corset").

In addition, the Bank of England

has sold a very large volume of government securities (gilts) to nonbanks
(£4 billion, net of redemption,

in the three months to mid-December).

The sharp increase (from 13 to 15 per cent) in the Bank of England's Minimum Lending Rate on October 7 and the subsequent gradual decline in that
rate (to 14 per cent on January 7) evidently generated expectations of
declining interest rates that gave strength to the bond market.
Data recently received confirms that the Italian central bank
was successful throughout most of 1976 in reducing the rate of growth of
the Italian monetary base.

Whereas the total base (adjusted for reserve

requirement changes and for seasonal factors) increased almost 24 per cent
in the 12 months ending September 1975, it increased less than 10 per cent
in the 12 months to September 1976.

However, the base increased by almost

5 per cent in October 1976 alone and, given the unwinding (from mid-October
to mid-July 1977) of the import-deposit scheme and the continuing large
government deficit, it is likely that it has been growing rapidly in subsequent months as well.

The strength of the Treasury bill market, re-

flected in the general decline in Italian short-term interest rates from
their end-October peak, suggests that the banks are very liquid.

Indeed,

the Bank of Italy seems to have acknowledged the difficulty of controlling
the growth of the monetary base by announcing, on October 15, that a ceiling of 11 per cent would be imposed on the expansion of bank credit in the
period from end-June 1976 to end-March 1977.

The ceiling, which was

justified publicly in terms of the need to meet the DCE target agreed upon
with the EC, applies to customers with 100 million lire (just over $100,000)
or more of outstanding debt; these customers account for the bulk of bank
credit.

IV - 16

Near the end of September, Prime Minister Barre of France
announced his anti-inflationary program and noted a target for the
growth rate of M 2 of 12.5 per cent during 1977.

Also in September, the

Bank of France raised its discount rate (from 9.5 to 10.5 per cent) and
lowered the ceilings for the expansion of bank credit in 1977 (as compared with the ceilings in the second half of 1976).

Since then there has

been little change in the basic stance of French monetary policy.

At the

end of October, the Bank of France began to require banks to hold interestfree reserves at the Bank of France in amounts equal to 0.5 per cent of new
and outstanding loans.

In addition, the base on which these reserves are

calculated was slightly enlarged, as of January 1, by disallowing the deduction from that base of certain bonds denominated in French francs
which had been issued on the domestic capital market and are officially
quoted on a stock exchange.

But short-term interest rates have fallen

from their October peak (though long-term yields have continued to rise).
The slow growth of M1 in Canada in recent months -- 2.2 per cent
(SAAR) for the September-November period compared with the target rate of
8-12 per cent announced last August -- prompted the Bank of Canada to lower
its discount rate from 9.5 to 9 per cent on November 22 and to 8.5 per cent
on December 21.

Governor Bouey stated that the trend of employment and

output -- in addition to the money stock data -- supports the judgment

that a reduction in the discount rate will be constructive, but he
emphasized that it should not be interpreted as a change in the basic
orientation of Canadian monetary policy.

IV -

In contrast to Canada, monetary growth in Germany and Switzerland has exceeded target rates.

Available German data show that the

average level of "Central Bank Money" (CBM) in January through November
1976 was 8.9 per cent above the 1975 average; the target for all of 1976
was for an increase of 8 per cent.

The Bundesbank announced in mid-De-

cember that it will aim for an 8 per cent growth rate of CBM in 1977,
comparing the average level of CBM in 1977 with the average level in 1976.
According to the Bundesbank, growth of CBM was particularly steep in the
last few months of 1976, so that the new 1977 target implies a growth
rate of CBM of 6 to 7 per cent from 1976Q4 to 1977Q4.
The Swiss National Bank announced at the end of November that
it has set a target of 5 per cent for the growth of M 1 in 1977, again
comparing the average level of M1 in 1977 with the average level in 1976.
In its latest report, the SNB said that the slow growth of M1 in 1975
(relative to the target) was offset by excessive growth in 1976, so that,
on balance, Ml growth in 1975-76 was in line with the 6 per cent targets
it had set for each of those years.
There seems to be a broad consensus that some stimulative
actions are needed in Japan, but the December election and the change in
government have slowed the decision-making process.

A moderate program

concentrating on increased and accelerated public works spending and
promotion of private investment was adopted in November; a supplemental
budget (incorporating increased outlays for public works) was approved by
the Cabinet on January 5 and will be introduced in the Diet around midJanuary.

A reduction in the Bank of Japan's discount rate in January is

also widely expected; it now stands at 6.5 per cent.

IV - 18

The Bank of Japan recently announced its credit ceilings for

the first quarter of 1977.

The ceilings allow for an expansion of cred-

it by city banks of a little over 2 per cent in the current quarter over
the previous quarter -- a slower rate of expansion than in previous
quarters, but a rate thought to be ample given the weak demand for credit.
In the smaller European countries, the situation is mixed.

the Benelux and some of the Scandinavian countries, monetary conditions
were tightened sharply in the third quarter in an attempt to defend the
exchange-rate relationship with Germany in the EC "snake".

Since the

"snake" realignment in mid-October, market interest rates have declined
significantly in Belgium and the Netherlands and, to a lesser extent, in
Denmark.

Last week, the central bank discount rate in Belgium was lowered

from 9 to 8 per cent and in the Netherlands from 6 to 5 per cent; the
Dutch rate had declined from 7 to 6 per cent in late November.

The dis-

count rate in Denmark was lowered from 11 to 10 per cent in December, but,
because of balance-of-payments problems, policy -- especially fiscal policy-remains very tight.

Sweden and Norway, where inflation rates remain

relatively high and unemployment rates relatively low, monetary policy has
not eased significantly since the "snake" realignment.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 17-18, 1977 : Greenbook Part 2

FRASER