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Content last modified 6/05/2009.

CONFIDENTIAL (FR)

January 14,

SUMMARY AND OUTLOOK

By the Staff
Board of Governors
of the Federal Reserve System

1976

SUMMARY AND OUTLOOK

I -1
DOMESTIC NONFINANCIAL DEVELOPMENTS
Summary.

The pace of economic activity appears to have

picked up appreciably in recent weeks,

following a two-month pause.

Retail sales surged in the pre-Christmas period, and industrial
production and employment showed strong gains in December, supporting continued growth in real personal income.

However, indications

of a strong recovery in capital spending are still lacking, and the
most recent Commerce survey suggests less strength in this sector
during 1976 than most earlier surveys.

While wholesale prices of farm

products and foods declined last month and the wage index was unchanged,
industrial commodity prices continued to rise at a substantial rate,
and underlying inflationary pressures do not appear to have eased.
Industrial production is estimated to have risen by about
1 per cent in December--about twice the upward revised gain in
November.

The December increase was about equal to the rate of rise

during the first five months of recovery.
based in

December in

Strength was broadly

both durable and nondurable goods sectors;

put of both materials and final products rose strongly.

out-

Output

increases were widespread among consumer goods industries, with auto
assemblies edging up to a 7.8 million unit annual rate.

A good

gain in new car sales in December suggests that scheduled increases
of production in the first quarter may be realized.

Business equip-

ment production rose strongly in December after having slowed in the
previous two months.

I - 2
Nonfarm payroll employment rose by 240,000 in December,
almost as much as the average increase during the summer months.
Gains in December occurred in 66 per cent of the 172 reporting
industries.

Manufacturing employment increased by 80,000, with

most of the rise in durable goods, and there were also moderate job
gains in the trade and service industries.

The factory workweek

jumped 0.4 hours in December to a level 1-1/2 hours above its February
low; part of the reported rise in December, however, may reflect
seasonal adjustment problems.

The unemployment rate remained un-

changed last month as the rise in total employment was about matched
by an increase in the labor force, following several months of little
net change.
Retail sales in December rose strongly--by 3-1/2 per cent,
spurred by strong auto sales and vigorous Christmas buying.

Excluding

autos and outlets selling mainly nonconsumption items, retail purchases
were up 2.2 per cent.

Gains were widespread, but were particularly

strong at general merchandise stores and at furniture and appliance
outlets.

Fragmentary data suggest that strength in sales may be carry-

ing over into early January.
Unit sales of domestic model new cars in December increased
strongly, to an 8.2 million annual rate, about 8 per cent above
November and over 40 per cent above their April low.

Sales of foreign

cars, which recently have been curtailed by shortages and increased

I - 3

price competition from small domestics, also rose somewhat, to a
1.4 million rate.

Total unit auto sales reached a 9.6 million annual

rate in December, the highest since late 1974.
It now appears that inventory liquidation is nearing an
end in manufacturing.

The book value of factory stocks rose at a

$2.4 billion annual rate in November, and revised estimates for
October now show a small rise.

Durable goods stocks are still being

reduced, but the decline has become progressively smaller and has
been partly offset by accumulation of nondurables.

The acceleration

of industrial activity in December suggests a further strengthening
of inventory investment in manufacturing.

Trade inventories had

already turned up in the third quarter, and these stocks rose rapidly,
at a $20 billion annual rate, in October.

Retail stocks may have

been drawn down temporarily in December by the surge in retail sales.
In contrast to the improved outlook in other sectors, the
latest reports on business spending have been disappointing.

New

orders received by durable goods manufacturers fell by 2.6 per cent
in November, to a level slightly under that of last July, and orders
for nondefense capital goods dropped by 1.3 per cent,
a little above last Spring.

to a level only

In addition, there was a sharp drop in

November in contracts for commercial and industrial building which
offset the increases of the two previous months.
The most recent Commerce Department survey of anticipated
plant and equipment spending for 1976 indicates a year-over-year

I-4

increase of 5-1/2 per cent in nominal terms, and a 9-1/2 per cent
expected price rise.

During the short period of its existence

1971), this December survey has been quite accurate.

(since

These new

data suggest a weaker outlook for capital spending than the earlier
Commerce survey (covering plans for the first two quarters of the
year) or the McGraw-Hill survey, which reported a 9 per cent increase
for 1976 as a whole.
Residential construction activity has continued to improve.
Housing starts in November were at a seasonally adjusted annual rate
of 1.38 million, down only slightly from the strong October pace.

In

the fourth quarter, they probably averaged somewhat over 1.4 million
units, about 13 per cent above the third quarter and some 40 per cent
above the cyclical low in the first quarter.

The continued rise in

mortgage commitments outstanding, and the increase of residential
building permits in November, suggest further gains in activity in
coming months.
The hourly earnings index was unchanged in December, after
two months of sharp increases.

This is an erratic series, and a

longer perspective suggests little moderation in wages.

For the

fourth quarter as a whole, the index rose at about a 7-3/4 per cent
rate; in December the index was 7.6 per cent above a year earlier.
Wholesale prices declined 0.4 per cent in December on a
seasonally adjusted basis, as prices of farm and food products declined sharply for the second month in a row and more than offset a

I - 5
further rise in industrial commodity prices.

The December price index

for farm and food products was unchanged from a year earlier, after
increasing by 11 per cent during 1974.

Industrial commodity prices

rose 0.6 per cent in December, the same as in November, and were 6
per cent above a year ago.

Over the past half year, however, they

have moved up at close to a 9 per cent annual rate.
Outlook.

It now appears that activity in the fourth

quarter of 1975 was somewhat stronger than indicated earlier, the
result of a more rapid swing to inventory accumulation and increased
government purchases of goods and services.

We now estimate a fourth

quarter increase of real GNP at around a 6 per cent annual rate.
Our fiscal policy assumptions remain largely unchanged.
Although Federal spending is now estimated to be $2 billion larger,
at $372 billion for FY 1976, this is largely the result of the smaller
than expected sales of oil leases--a transaction in property rights
rather than in income or product.

While fiscal policy for FY 1977 is

subject to active debate, the course of policy in that fiscal year,
which starts October 1, will have little effect on activity during
1976.

For now, we have assumed a further six-month extension of

current tax rates, beginning in July, and a continuation during the
latter half of 1976 of growth in Federal spending along the patterns
of recent experience.
With respect to monetary policy, we assume [M1 growth] for
the year beginning in the third quarter of 1975 to average 6-1/4

I - 6
per cent--the mid-point of a 5 to 7-1/2 per cent range adopted by
the FOMC.

This pattern of monetary expansion, in conjunction with

our GNP projection, is still expected to result in a cyclical rise
in short-term interest rates.

But the projected increase in 1976

has again been reduced, in part, because the recent shortfall of money
growth is assumed to be made up.

Given present interest rate ex-

pectations, we have dropped our previous assumption of an increase
during 1976 of Regulation Q ceiling rates on time certificates of
deposit.
In reevaluating the GNP outlook in light of the unfolding
economic news since early December, three events have stood out:
(1)

the renewed momentum of consumer buying, (2)

indications of a

smaller 1976 recovery in business fixed investment than had been
previously projected, and (3)

the likelihood that the increase in

short-term interest rates will be more moderate.

Projected con-

sumption expenditures have been strengthened only a little, because
the recent resumption of more aggressive buying had largely been
anticipated.

Upward revisions were also made in projections for

net exports, mainly reflecting larger sales of military goods, and
in residential construction, reflecting the change in interest rate
expectations.

Projections of business fixed investment have been

revised downward.

The projected year-over-year increase in plant

and equipment outlays now amounts to 7 per cent in nominal terms-slightly more than the recent Commerce survey indicates, allowing for
some expansion in business plans during the year.

I - 7
Taken together, these changes have resulted in a slightly
weaker outlook for 1976.

The annual growth rate of real GNP this

year is now projected to average about 4-1/4 per cent for the four
quarters.

In terms of year-to-year growth, this is equivalent to

a 5-1/2 per cent increase.

The unemployment rate is still projected

to edge down only slightly during 1976, to the neighborhood of 8 per
cent in the second half.
In our price projections, we have incorporated slightly
higher wage (and unit labor cost) assumptions and somewhat lower
energy prices--the latter as a consequence of the recently enacted
Energy Policy and Conservation Act.

Compensation per man hour is

now projected to rise about 8-3/4 per cent during 1976, close to
half a per cent more than during 1975.

The Energy Act implies a near-

term reduction in the average price of all domestically-produced
crude oil from its recent level of around $8.60 per barrel to $7.66.
A sizable part of this rollback will be achieved automatically due
to competitive pressures that arise from the recent termination of
the $2.00 oil import fee.
on import prices.

However, there may be other upward pressures

In addition, the rollback in domestic crude oil

prices is not expected to be passed through on a one-for-one basis,
due to a number of factors operating to push up prices of refined
product.

We have assumed a quite moderate decline in prices of re-

fined oil products through mid-year, and small price increases thereafter as the Act's provisions for gradual decontrol start taking hold.
By year-end, prices of fuels are expected to be about the same as a
year earlier.

I-8

In consequence of these various factors, the fixed-weighted
price index for gross private product, which increased at a 6-1/2 per
cent annual rate in the last half of 1975, is projected to rise at
around a 5-1/2 per cent annual rate during the four quarters of 1976.
Details on these projections are presented in the tables
that follow.

I

- 9

STAFF GNP PROJECTIONS

Per cent change, annual rate
Gross private
Changes in
product
Unemployment
nominal GNP
fixed-weighted
rate
($ billions)
Real GNP
price index
(per cent)
12/10/75 1/14/76- 12/10/75 1/14/761'12/10/75 1/14/761-12/10/75 1/14/76
1972 2/
1973 2/
1974 2/
1975
1976

103.1
136.9
102.5
30.2
168.9

103.1
136.9
102.5
n.a.

6.2
5.9
-2.1
-2.9
5.6

1974-I
II
III
IV

14.8
25.0
32.5
14.6

14.8
25.0
32.5
14.6

1975-I
II
III
IV

-14.3
24.3
62.6
45.6

1976-1
II
III

IV
Change:
74-II to
75-1 2/
74-IV to
75-IV
75-II to
76-11
75-IV to
76-IV

n.a.
n.a.

5.6
4.9
5.6
8.5
8.0

5.6
4.9
5.6
8.5
8.0

14.1
12.3
13.8
12.6

14.1
12.3
13.8
12.6

5.2
5.1
5.5
6.6

5.2
5.1
5.5
6.6

-11.4
1.9
13.2
6.1

7.7
5.5
7.3
6.5

7.7
5.5
7.3
5.9

8.3
8.9
8.4
8.4

8.3
8.9
8.4
8.4

4.8
4.8
4.6
4.3

4.5
4.5
4.3
4.0

5.9
5.6
5.3
5.0

5.6
5.6

8.2
8.1
7.9
7.9

8.2
8.1
7.9
7.9

n.a.

-5.3

n.a.

9.8

n.a.

3.8

3.8

n.a.

1.8

n.a.

6.7

n.a.

1.8

1.8

n.a.

-

.8

-

.8

5.6

-

.5

-

.5

6.2
5.9
-2.1
n.a.

3.3
6.3
11.4
9.2
6.0

-7.0
-1.6
-1.9
-9.0

-7.0
-1.6
-1.9
-9.0

-14.3
24.3
62.6
47.9

-11.4
1.9
13.2
5.0

37.7
39.4
39.5
41.2

37.0
40.3
41.0
42.5

57.1
118.3

n.a.

n.a.

185.4

193.1

6.9

"6.7

6.3

157.8

160.8

4.7

4.3

5.4

3.3
6.3
11.4

5.6
5.5

1/ Projected figures are based on indications of effects of new revisions in income
and product data and may not be strictly comparable to previous projections.
2/ Actual.

I - 10

REVISED NATIONAL INCOME AND PRODUCT ACCOUNTS

The GNP and related income and product data shown in the following
tables for the period 1974-I through 1975-III are the Commerce Department
unrevised previously-published estimates.

The staff projection of GNP and

related items for the period 1975-IV through 1976-IV are based on STRICTLY
CONFIDENTIAL indications of the effects of the revisions on major income
and product accounts components to be released on January 16 by the
Department of Commerce.

The new revisions of the accounts include, in

addition to the usual statistical revisions, twenty definitional and
classificational revisions--some of which are relatively large and affect
relationships among various components of the accounts significantly.
Because detail on both the nature of these revisions and their magnitude
are not available, the projections of some of the N.I.P.A. components may
be more tenuous than usual.
The revised estimates of the national income and product accounts
(N.I.P.A) to be released on Friday will be for those N.I.P.A. tables which
will be carried regularly in the Survey of Current Business and will in
general cover the period 1947-I through 1975-III.

A brief description of

the highlights of the revision is scheduled for release about the middle of
next week.

Preliminary estimates for the final quarter of last year are

scheduled to be released on January 20.
The revised N.I.P.A. data for the period 1970-I through 1975-III

and for 1968-1975 will be included in the Supplement to this Greenbook,
along with a brief discussion of some of the more important effects of the
revisions on major income and product account components.

CONFIDENTIAL - FR

January 14, 1976

I-11
GROSS NATIONAL PRODUCT AND RELATED ITEMS
Expenditures and income
(Quarterly figures are seasonally adjusted.
of dollars, with quarter figures at annual rates.)
figures are billions

LIP

1TV9
I

IV

III

II

fI/O

IV

------------------- Revised N.I.P.A*Basis--------------------

1576.4
1567.4
1223.4
1202.9

1613.4
1600.4
1252.1
1236.4

1653.7
1639.2
1283.8
1269.8

1694.7
1679.7
1316.5
1302.9

1737.2
1721.2
1347.1
1333.5

1499.8
1511.7
1180.7
1159.6

1674.8
1660.1
1299.9
1285.7

Personal consumption expenditures
Durable goods
Nondurable goods
Services

998.3
133.8
424.6
439.9

1024.2
137.3
435.3
451.6

1048.9
141.0
445.5
462.4

1072.7
145.0
454.7
473.0

1096.1
150.1
463.4
482.6

963.1
127.1
410.0
426.0

1060.5
143.4
49.7
467.4

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

213.6
54.3
150.3
9.0
7.0

225.2
58.0
154.2
13.0
12.0

235.4
62.8
158.1
14.5
14.5

245.2
67.0
163.2
15.0
15.0

253.4
68.9
168.5
16.0
16.0

184.7
48.5
148.1
-11.9
-12.9

239.8
64.2
161.0
14.6
14.4

Net exports of goods and servicesExports
Imports

20.5
151.5
131.0

15.7
154.7
139.0

14.0
158.5
144.5

13.6
163.1
149.5

13.6
167.5
153.9

21.0
147.2
126.2

14.2
161.0
146.7

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

344.0
130.0
88.8
41.2
214.0

348.3
131.8
89.6
42.2
216.5

355.4
133.8
91.1
42.7
221.6

363.2
135.8
92.2
43.6
227.4

374.1
141.0
95.9
45.1
233.1

331.0
123.2
84.3
38.9
207.8

]60.3
135.6
92.2
-3.4
224.7

Gross national product in
constant (1972) dollars
GNP implicit deflator (1972=100)

1219.3
129.3

1232.8
130.9

1246.6
132.7

1259.9
134.5

1272.2
136.6

1186.9
126.3

1252.8
133.7

Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)

1294.5
830.2
1113.6
91.3
8.2

1326.7
850.4
1143.8
95.5
8.3

1354.7
870.9
1168.8
95.6
8.2

3187.0
890.7
1194.6
97.5
8.2

1418.4
913.4
1220.7
100.1
8.2

1245.9
801.5
1076.6
89.6
8.3

1371.7
881.4
1187.0
97.2
8.2

Corporate profits with I.V.A. and C.C.Adj
Corporate profits with IV.A., without
C.C.Adj.
Corporate profits before tax

S117.6

120.4

128.3

136.5

142.8

101.6

132.0

123.6
134.6

126.4
136.4

134.3
143.3

142.0
150.0

148.3
155.3

107.1
117.4

137.8
146.3

302.9
374.8
-71.9

309.0
384.9
-75.9

317.9
391.1
-73.2

329.6
401.5
-71.9

339.3
412.8
-73.5

282.5
357.1
-74.6

324.0
397.6
-73.5

-5.4

-11.7

-7.3

-8.6

-5.3

-8.9

-8.2

13.6

15.0

14.7

13.7

13.8

10.3

14.3

Gross National Product
Final purchases
Private
Excluding net exports

1/

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

Receipts2/
Expenditures
Surplus or deficit (-)2/
High employment surplus or deficit

(-)

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

--------------------

Published Basis------------------------

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

95.4
2.2
93.2
8.4

95.8
2.2
93.6
8.2

96.3
2.2
94.1
8.1

96.7
2.2
94.5
7.9

97.1
2.2
94.9
7.9

94.9
2.2
92.7
8.5

96.5
2.2
94.3
8.0

Nonfarm payroll employment
Manufacturing

77.6
18.5

78.0
18.6

78.5
18.8

79.0
18.9

79.3
19.0

77.0
18.4

78.7
18.8

Industrial production (1967-100)
Capacity utilization,
mfg. (per cent)
Major materials (per cent)

117.5
70.6
80.6

119.5
71.3
81.2

121.5
71.9
81.9

123.3
72.4
82.3

125.1
72.8
82.7

113.4
68.7
74.9

122.4
72.1
82.0

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

1.43
9.20
7.90
1.30

1.55
9.60
8.10
1.50

1.65
9.75
8.25
1.50

1.70
10.00
8.50
1.50

1.73
10.20
8.70
1.50

1.19
8.66
7.09
1.57

1.66
9.89
8.39
1.50

(millions)

*N.I.P.A.: National Income and Product
'"counts
exports of g. & s. (Bal. of paymts)
16.6
11.2
9.1
8.7
8.7
16.9
9.4
xports
152.0
154.9
158.7
163.3
167.7
147.5
161.2
imports
135.4
143.7
149.6
154.6
159.0
130.7
151.7
2/ Federal government N.I.A. receipts in 1975-11 reflect the $8.1 billion rebate of 1974 individual income taxes and in
1975-III and following quarters the $9.3 billion
reduction in 1975 individual income taxes; the withholding rates

associated with the latter reduction are assumed to be continued in 1976.
3/ Includes $.3 billion, annual rate of shipments of military equipment and supplies to Israel
which are not included
in GNP
exports.

CLASS

II

January 14,

I-12

CONFIDENTIAL - FR

CHANGES IN GROSS NATIONAL
PRODUCT
AND RELATED ITEMS

FOMC

1976

1975
I

TV

Gross National Product
Inventory change

11.3
36.6

Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods

Services
Residential fixed investment
Business fixed investment
Government
Federal

26.7
-1.6
28.3
20.9

2.8
8.2
10.7

3.9
3.5
9.9
5.8
4.1

State and local
GNP in constant (1972)
Final purchases
Private

dollars

18.0
10.3
7.9

13.5
9.8
10.1

-------------Gross national product
Final purchases
Private
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Residential structures
Business fixed investment

92.9
-21.6
114.5
84.6
13.3
71.2
77.2
5.2

13.8
13.0
13.9

13.3
13.7
11.1

12.3
11.4
9.2

n Per Cent Per Year-

-6.8
26.1
97.4
16.3

39.7
41.4
15.7
12.9

19.3
2.4
6.9
)5.9
46.6
28.6

--------------

9.7
8.7
9.7

10.4
10.1
10.5

8.8

10.8

10.0

6.2
8.1
10.4

10.9
10.5
11.1

11.2
9.7
9.9

44.3

23.6

19.4

17.7

14.1

-13.0

29.8

34.7

30.2

37.4

29.6

11.8

-11.2

32.4

9.9

10.8

10.5

13.5

13.6

.1

10.3
10.3
10.6

10.4
10.3
9.6

6.6
8.2
7.7

iL.7
9.8
10.1

9.4

9.0

8.7

10.1

11.8
8.5
9.5

14.8
7.9
8.4

4.3
.3
9.7

12.8
9.7
?.7

8.7

12.6
16.2
17.0
14.5
10.4
4.0
3.7
3.8
6.2
5.5

Wage and salary disbursements
Disposable income

11.0
11.8
10.3

10.3
10.1
11.3

8.7
10.0
9.0

9.9
9.4
9.1

9.4
10.6
9.0

7.9
5.0
9.5

Corporate profits before tax

16.7

5.5

21.8

20.1

14.9

-11.1

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

13.7
12.7

Nonfarm payroll employment

3.2
4.4

Manufacturing
Housing starts, private

12.1
65.9

Sales new autos
Domestic models

21.8

Foreign models

119.2

13.1
9.9
9.2

GNP in constant (1972) dollars
Final purchases
Private
GNP implicit deflator2/
Private GNP fixed weighted index3/

Industrial production

26.5

L48.4

37.7
-6.1
13.1
29.9
11.5

-23.8
-7.7
-10.9
/

.75.0

34.3

18.4

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

Personal income

9

1 76

III

40.3
1.5
38.8
31.7
-1.7
33.4
24.7
3.7
10.2
10.8
4.8
3.9
7.1
2.0
5.0

47.9

Final purchases

1975

II

-. 4

-65.0

8.3
11.2

15.6
11.1

-2.0
19.0

2.1
2.2

2.6
2.1

-1.8
-8.2

7.0
38.0
18.6
10.5
77.3

6.1
12.7

-9.1
-11.0
-2.4
-4.8
10.6

10.7

12.7
.0

.4.6

-

1/ Percentage rates are annual rates compounded quarterly.
2/

/

Excluding Federal pay increases rates of change are:
1976-IV, 5.5 per cent.

Using expenditures in 1967 as weights.

1975-IV, 5.9 per cent;

1976-1, 4.9 per cent; and

1976

CONFIDENTIAL -

FR

CLASS II FOMC

January 14,

I-13
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted.
Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)

1974
I

II

III

IV

I

1975
II

III

------------------------ Published Basis--------------------1416.6
1330.9
1358.8
1383.8
1416.3
1430.9
1341.9
1407.6
1471.9
1370.3
1413.1
1435.8
1104.2
1133.8
1045.6
1065.9
1095.3
1089.3
1117.6
1034.3
1067.4
1098.4
1095.4
1087.4

Gross National Product
Final purchases
Private
Excluding net exports

1504.4
1509.8
1166.3
1153.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

840.6
123.9
364.4
352.4

869.1
129.5
375.8
363.8

901.3
136.1
389.0
376.2

895.8
120.7
391.7
383.5

913.2
124.9
398.8
389.5

938.6
130.6
410.1
397.9

968.8
138.6
322.7
407.5

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

210.5
48.4
145.2
16.9
13.1

211.8
48.8
149.4
13.5
10.4

205.8
150.9
8.7
6.6

209.4
40.4
151.2
17.8
17.5

163.1
35.3
146.9
-19.2
-17.8

148.1
36.4
142.7
-31.0
-30.6

179.1
41.0
143.6
-5.5
-7.2

1/
Net exports of goods and servicesExports
Imports

11.3
131.2
119.9

-1.5
138.5
140.0

-3.1
143.6
146.7

1.9
147.5
145.7

8.8
142.2
133.4

16.2
136.0
119.8

13.0
142.7
129.8

Gov't. purchases
Federal
Defense
Other
State & local

296.3
111.5
75.8
35.7
184.8

304.4
114.3
76.6
37.7
190.1

312.3
117.2
78.4
38.8
195.1

323.8
124.5
34.0
40.6
199.3

331.6
126.5
84.7
41.8
205.1

338.1
128.4
84.8
43.6
209.7

343.5
130.5
86.1
44.4
213.0

830.5
163.6

827.1
167.3

823.1
172.1

804.0
178.0

780.0
181.6

783.6
183.9

808.6
186.1

1112.5
727.6
950.6
84.4
8.9

1134.6
745.2
966.5
71.5
7.4

1168.2
763.0
993.1
65.5
6.6

1186.9
769.2
1008.8
86.5
8.6

1193.4
765.1
1015.5
75.9
7.5

1220.5
773.0
1078.5

1255.2
791.4
1079.6
84.6
7.8

1(
12

105.6
139.0

105.8
157.0

103.4
131.5

94.3
101.2

104.9
113.3

123.0
134.6

2
2i

288.6
291.6
-3.0

302.8
304.7
-1.9

294.7
319.3
-24.5

254.1
338.5
-54.4

251.8
355.0
-103.3

295.8
362.7
-67.0

10.5

26.1

21.0

11.0

-35.8

-5.0

of goods and services

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
Personal income
Wage and salary disbursements
posable income
Personal saving
Saving rate (per cent)
Corporate profits & inventory val.
Corporate profits before tax

adj.

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

(-)

High employment surplus or deficit (-1 1
State and local government surplus or
deficit (-), (N.I.A. basis)

46.2

113.8

10.6

4.1

3.2

2.0

2.1

-.1

-1.6

-. 9

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

92.7
2.2
90.5
5.2

92.9
2.3
90.6
5.1

93.6
2.2
91.4
5.5

94.0
2.2
91.8
6.6

94.0
2.2
91.8
8.4

94.7
2.2
92.5
8.9

95.4
2.2
93.2

Nonfarm payroll employment
Manufacturing

78.2
20.2

78.5
19.8

78.7
20.1

78.3
19.6

76.9
18.5

76.4
18.1

77.0
18.3

125.4
79.4
88.5

121.3
75.7
79.1

111.6
68.2
70.0

110.4
67.0
70.9

114.2
69.0
78.0

(millions)

Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials (per cent)

1:

125.5
80.1
90.2

Housing starts, private (millions, A.R.) 1.61
1.53
1.21
1.00
1.00
1.07
1.26
Sales new autos (millions, A.R.)
9.04
9.17
10.07
7.38
8.31
7.90
9.21
Domestic models
7.49
7.92
8.52
6.05
6.60
6.33
7.52
1.69
1.55
1.33
1.71
1.57
1.55
1.25
Foreign models
18.2
20.1
4.0
12.7
-.9
.3
1/ Net exports of g. & s, (Bal.of paymts)12.0
149.0
140.8
148.4
153.7
148.7
142.0
133.3
Exports
130.8
120.7
149.7
135.7
149.7
141.7
121.4
Imports
"' Federal government N.I.A. receipts in 1975-II reflects the $8.1 billion rebate of 1974 individual
'ncome taxes and in 1975-III and following quarters the $9.3 billion reduction in 1975 individual
Lncome taxes; the withholding rates associated with the latter reduction are assumed to be continued
in 1976.
3/ Includes $.3 billion, annual rate of shipments of military equipment and supplies to Israel which are
not included in GNP exports.

1976

CONFIDENTIAL - FR

January 14, 1976

Class II FOMC

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
I

II

III

--------------------------

IV

14.8
-12.0
26.8
16.9
2.0
14.9
16.7
-. 4
12.3
5.0
-5.2
3.3
9.9
3.1
6.9

25.0 .
-3.4
28.4
20.3
-12.8
33.1
28.5
5.6
11.4
11.4
.4
4.2
8.1
2.8
5.3

32.5
-4.8
37.3
29.4
-1.6
31.0
32.2
6.6
13.2
12.4
-2.6
1.5
7.9
2.9
5.0

9.1
5.5
-6.0
5.0
-11.0
-5.5
-15.4
2.7
7.3
-5.8
.3
11.5
7.3
4.2

-14.3
-37.0
22.7
14.9
6.9
8.0
17.4
4.2
7.1
6.0
-5.1
-4.3
7.8
2.0
5.8

GNP in constant (1958)
Final purchases
Private

-15.2
-5.8
-6.1

-3.4
-1.0
-. 8

-4.0
-. 8
-. 9

-19.1
-25.0
-25.4

-24.0
-1.3
-2.7

-------Gross National Product
Final purchases
Private
Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.4
-1.3
14.7
5.9

14.6

24.3
-11.8
36.1
29.6
7.4
22.2
25.4
5.7
11.3
8.4
1.1
-4.2

6.5
1.9
4.6
3.6
8.9
7.4

n Per Cent Per Year

25.0
10.2
9.3

-----------------

7.6
8.7
8.0

9.7
11.3
11.5

4.2
1.6
-2.2

-3.9
6.6
5.6

7.0
10.4
11.2

18.8
10.7
12.0

14.3
19.3
13.1
13.6

15.7
22.0
14.8
14.3

-2.4
-38.1
2.8
8.0

8.0
14.7
7.4
6.4

11.6
19.5
11.8
8.9

13.5
26.8
12.9
10.0

2.5
3.3
12.1

-10.9
-19.7
4.1

7.2
-41.5
.8

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

11.4
10.4
4.3
24.4
12.0

10.8
10.5
9.7
12.2
10.9

15.6
27.3
31.8
19.9
8.9

GNP in constant (1958) dollars
Final purchases
Private
2
GNP implicit deflator3
Private GNP fixed weighted index-

-1.6

9.4
11.1

-1.9
-. 4
-. 5
11.9
12.7

-9.0
-11.7
-14.3
14.4
12.5

4.9
6.0
4.9

8.2
10.0
6.9

12.4
9.9
11.5

6.6
3.3
6.5

2.2
-2.1
2.7

9.4
4.2
27.2

11.9
9.9
.4

Corporate profits before tax

48.3

11.1

62.8

-50.8

-64.9

57.1

99.2

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

15.4
16.3

16.0
16.0

21.2
19.2

-10.3
20.6

-13.6
26.3

-38.3
21.0

90.4
9.0

Nonfarm payroll employment
Manufacturing

1.5

1.5

1.0

-2.0

-7.0

-2.6

3.2

-2.0

-7.7

6.2

-9.6

-20.6

-8.4

4.5

-. 3
-60.9
45.4
33.9
136.4

-12.5
-53.3
-71.2
-74.6
-45.8

-28.4
.0
60.8
41.6
173.3

,ss private domestic investment
Residential structures
Business fixed investment

Personal income
Wage and salary disbursements
Disposable income

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

-22.7
-33.5
9.6

---

III

Published Basis--------------------

Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential fixed investment
Business fixed investment
Government
Federal
State and local
dollars

1975
II

I

-. 5
-. 5

-40.0

1.9
-18.4
5.9
25.0

-20.2

-57.7

-6.5

-2.4
-37.1

lercentage rates are annual rates compounded quarterly.
Excluding Federal pay increases rates of change are:
3/

Using expenditures in

1967 as weights.

1975-I, 8.3 per cent.

-63.2
-41.7
-10.9
10.0
6.6
3.4
12.4
12.2
-11.4
-. 7

-1.7
8.4
7.5

-32.0
13.1
-11.0

113.9
61.0
2.5

8.1
6.1
.5
18.4
9.3

6.5
6.7
6.3
7.5
6.4

1.9
4.6
4.7
5.1
5.5

13.4
5.2
5.8
4.8
7.0

-4.2
31.1
-18.3
-15.4
-28.9

14.5
92.3

84.7
99.2
34.3

I - 15
DOMESTIC FINANCIAL DEVELOPMENTS
Summary.

In the weeks since the last Committee meeting,

financial market participants have become increasingly convinced that
credit demands and monetary policy are unlikely to lead to significant
increases in interest rates in the months ahead.

These views gained

support from the continued weakness in the monetary and credit statistics
and the more accommodative System policy stance.
expectations were reinforced by the developing

At the same time, such
standard

forecast for

1976 of only moderate real economic growth accompanied by continued
slowing of inflation.
Reflecting the more ebullient market attitude in the
inter-meeting period, interest rates on short-term securities declined
5/8 to 1 percentage point and on long-term securities by about one-fourth
to over one-half of a percentage point.

Most of these declines have

occurred since the beginning of the new year and--except in the tax-exempt
market--investors seem to be more willing to acquire lower quality assets.
In equity markets, which absorbed almost $11 billion of new issues in
1975, prices have risen 7 to 9 per cent since the last FOMC meeting,
as investors focussed on rising corporate profits in an environment of
only moderate upward interest rate pressures.
All of the major depository aggregates were weak in December,
as M1 declined and growth in other time deposits--excluding the estimated
amount of corporate savings accounts--slowed perceptibly.

Bank credit

I -

16

(end-of-month series) contracted in December and the fourth quarter
rate of growth was below that of the preceding three quarters.
Virtually all categories of loans were weak in December.
loans declined sharply,perhaps

Business

reflecting a continuation of conservative

inventory policies, the rapid pace of retail sales last month, and
rising corporate profits.
With their relatively strong deposit inflows and unusually
comfortable liquidity positions, thrift institutions--particularly S&L's-apparently continued a high rate of residential mortgage commitments,
but in primary home mortgage markets, where credit demands have remained
strong, interest rates have been relatively sticky.

By mid-January the

conventional mortgage rate had declined only 5 basis points from the
level of early December and was only [18]basis points below its October
high.

In secondary markets, however, yields declined more in line with

general market developments, falling between 20 to 30 basis points in the
inter-meeting period.
Outlook.

Over the near term, business borrowing at banks and

in the commercial paper market is expected to remain quite modest in light

of still expanding corporate cash flows, continued above average reliance
on capital markets, and reduced capital spending plans.

During the first

quarter, however, markets will have to absorb a record $27 billion of
Treasury securities (only $4 billion of which has been issued).
this borrowing is expected to be short-term.

Much of

Banks, while still large

takers of Treasury issues, have slowed their acquisitions of such
securities in recent months--apparently reflecting their improved liquidity
positions.

With their portfolio liquidity improved and with an expected

I - 17

modest pick-up in business short-term credit demands to finance general
working capital needs, banks are unlikely to be particularly aggressive
buyers of Treasury bills and other shorter-term securities.

Similarly,

thrift institutions facing large takedowns of existing mortgage commitments,
are also expected to be a less significant factor in the Treasury securities
market.
The cumulative pressure of continued Treasury borrowing and
the expected increase in private credit demands is likely to lead to
some increases in short-term interest rates as the year progresses.
However, the staff now expects a smaller increase in short-term rates
than thought previously, accompanied by long-term rates somewhat lower
than current levels.

Institutional investors--particularly savings

banks, insurance companies, and pension funds--are expected to remain
relatively aggressive bond investors in light of their large cash inf1ows
and the financial market outlook.

Moreover, commercial banks with their

liquidity improved in 1975, are likely to place more emphasis on higher
yielding intermediate-term Treasury issues, rather than bills, in an
effort to improve earnings.
Even with a reduction in projected capital outlays, the staff
expects a much larger volume of new bond offerings than most forecasters,
since there appears to be considerable balance sheet restructuring yet
to be done.

This expectation, along with the likelihood of continued

large foreign borrowing in U.S. capital markets in 1976, suggests that

I - 18
further declines in long-term rates are likely to be modest.

However,

if inflationary expectations continue to abate, larger declines could
occur in long-term rates, even with increasing short-term rates.
The outlook for declining interest rates in the tax-exempt
market is more uncertain because of the New York situation.

In addition,

it is difficult to evaluate bank reactions to proposed SEC regulations
regarding bank publication of their specific tax-exempt bond holdings,
whenever holdings of a particular issuer exceed specified minimum ratios.

I - 19
INTERNATIONAL DEVELOPMENTS
Summary. Exchange markets in the last half of December were
relatively inactive, and the weighted average exchange rate for the
dollar held steady.

After the turn of the year, however, the dollar

came under some downward pressure in the market, mainly as a consequence
of declining U.S. interest rates.

A major factor in the strong position of the dollar in the
last half of 1975 was the unexpectedly large surplus in the goods and
services balance.

The merchandise trade balance registered another

large surplus in November, $8.6 billion at an annual rate, and it appears
that the fourth quarter surplus was about equal to the $8 billion rate
of the third quarter.

Exports held up well during the period of slack

demand in foreign markets, and rose somewhat in October-November in
response to reviving economic activity abroad.

Meanwhile

U.S. imports,

which had dropped sharply during the first half, have risen somewhat
faster than exports since mid-1975, with fuel accounting for much of
the increase.
The surplus balance on military and service transactions rose
sharply in the third quarter -- to an annual rate of $10 billion -- with
investment income receipts and military sales both increasing.

Goods

I -

20

and service transactions together registered an $18 billion surplus rate
in the third quarter, only moderately less than the record $20 billion
rate of the second quarter.
Capital account transactions through banks, together with transactions in securities with foreigners, resulted in a net capital inflow
of about $2 billion in November -- a sharp contrast with a net outflow
of $4 billion in October for these types of capital transactions.

The

shift between months occurred mainly in flows between foreign banks and
their U.S. agencies and branches; there is no evident divergence in
interest rate patterns that might account for such a shift.

Weekly data

on banks' foreign liabilities in December show a further large increase
in borrowings from foreign banks, but much of this was reversed in early
January as U.S. money market rates eased.

The increase in U.S. bank

claims on foreigners declined to about $1/2 billion in November,
bringing the 11-month total to about $11-1/2 billion, compared with
$19-1/2 billion for the year 1974.
U.S. purchases of new foreign bond issues exceeded $2.3 billion
in the fourth quarter, including a large IBRD issue, raising the total
for the year to about $7.0 billion ($2.4 billion in 1974).

At the same

time foreign purchases of U.S. corporate stocks were well sustained and
probably reached $3-1/2 billion for the year ($.5 billion in 1974).
Foreign official holdings of U.S. assets, apart from OPEC
funds, declined slightly in November, and probably also in December,

I - 21

but some increases have occurred since late last year as official purchases
of the dollar in exchange markets came into play.

The growth of OPEC

assets in the United States has slowed markedly, with funds held at
banks down about $350 million in November and perhaps rising by a
comparable amount in December.

OPEC countries' recorded purchases of

U.S. corporate stocks continued at about $125 million per month through
November, about the average for the year.
Outlook.

As incoming data indicate stronger than expected

trade results, and other elements of the current account also show
strength, projections of the outcome for goods and services have been
gradually raised for the year ahead.

Nevertheless, a considerable drop

off in the trade balance is still anticipated as demand is expected to
rise more rapidly here than in most other industrial countries.

Moreover,

absolute increases in exports to OPEC countries will probably be smaller,
and other developing countries are likely to have difficulties in
financing increases in their imports until their export markets and prices
strengthen again.
Whether recent downward pressure on the dollar continues will
depend mainly on trends in money market interest rates.

In most other

industrial countries authorities seem likely to continue a fairly accommodative policy, at least until an upward movement of private demand is
more clearly established.

However, in a few countries concern about the

balance of payments limits the scope for easing, and in others there is

I -

22

still a good deal of caution about the possible inflationary consequences
of any further easing.
The recent meeting of the IMF Interim Committee in Jamaica
succeeded in reaching agreement on the most prominent outstanding
issues on the agenda for international monetary reform:

the exchange

rate regime, the disposition of gold, and expansion of the scope of the
IMF's credit-granting capabilities.

While much depends on the way in

which these agreements are implemented, the reaching of accords on these
issues will give more assurance of support for developing countries
facing large deficits, and may tend to produce more coordination in
economic policy and activities directly affecting exchange markets.
[Note:

because of a change in accounting procedures in the

GNP accounts the balance on goods and services as recorded in the
balance of payments accounts will be less than the foreign balance in
the GNP accounts by the amount of interest paid to foreigners by the
U.S. Government.

Such payments will be counted as transfer payments in

the Government sector of the GNP accounts rather than as part of the
external goods and services sector.

In the third quarter such interest

payments were at an annual rate of $4.5 billion.]