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CONFIDENTIAL

(FR)

January 14,

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve Board

1976

TABLE OF CONTENTS
Section

Page

DOMESTIC NONFINANCIAL DEVELOPMENTS
Industrial production..................... ..............
......... 1
Capacity utilization..................... ..............
Nonfarm payroll employment................
.........
2
......... 2
Unemployment.............................. ..............
Hourly earnings index.................... .............. ......... 5
5
Wage and salary disbursements............. .............. ......... 5
Retail sales.......................................
Unit auto sales....................................
.........
7
. .
. .. .
.
Residential construction...........................
Anticipated business capital
spending plans................................... ............. 10
New orders........................................ ........... .13
Nondefense capital goods........................... ............. 13
Contracts for commercial and
industrial buildings............................. .......... . 13
Manufacturers' inventories......................... ............. 13
Wholesale prices .................................. ...........
.15
Consumer prices ................................... ............. 15
State and local government......................... ............. 17
Unified budget deficit............................ ........... .17
....

.........

,....7

TABLES:
Nonfarm payroll employment .............. ........................ 3
Hourly earnings index................... ........... ...... ....... 3
Selected unemployment rate............... ........................ 4
Cyclical changes in real
wages and salaries and personal income. ........................ 6
Retail sales.............................
Auto sales...............................
New private housing units................
New orders received by
manufacturers......................... ....................... 11
Contracts for business structures
and new orders........................ ....................... 11
Survey results of anticipated
plant and equipment expenditures....... ....................... 12
....................... 16
16
....................... 19
.......................14
....................... 14
Business inventories.................... .......................12
14
Inventory ratios......................... ....................... 14
.,..16
Wholesale prices.........................
16
Consumer prices.........................

Federal budget...........................

...
....

Continued

TABLE OF CONTENTS
Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

Monetary aggregates..................................****

.....................................
Business credit .....
Other securities markets..................................

5
8

Mortgage and consumer credit..............................

TABLES:
Selected financial market quotations.....................
Monetary aggregates.....................................

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

2
4

.................
Security offerings....................
Consumer instalment credit..............................

9
12

Interest rates and supply of funds for
conventional home mortgages at selected S&L's...........

Secondary home mortgage activity,........................

INTERNATIONAL DEVELOPMENTS

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

U.S. international transactions...................,,.......

Agricultural exports..............................

Bank-reported private capital transactions..............

Transactions in securities................................

U.S. liabilities to foreign official agencies............
Monetary and financial conditions in major

foreign countries........................................
,....."" .......... .............
Monetary reform negotiations..

8
15

TABLES:
U.S. merchandise trade................................... .

Short-term and long-term interest rates................
Growth of the money stock in major

industrial countries............

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

APPENDIX A
Technical note on the recent Revenue
Adjustment Act of 1975..................................

A-1

11 -- T - I

January 14, 1976

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

Period

Data

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

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

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

1-9-76
1-9-76
1-9-76
1-9-76
1-9-76
1-9-76

93.3
8.3
4.9
77.8
18.6
59.2

3.9 1/
8.31/
5.5-1
3.7
5.2
3.2

4
8.31/
5.82.5
2.9
2.4

1.6
7.2-1
4.8.1
-3.3
1.2

Dec.
Dec.

1-9-76
1-9-76

36.5
4.67

1/
36.33.67-' /

1/
36, 1 4.64-

1/
36.31
4.38-1

Dec.
Nov.

1-9-76
12-29-75

40.3
149.3

1/
39.95.7

1/
39.81.6

1/
39.4-1
8.2

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

Nov.

Nov.
Nov.
Nov.

12-16-75
12-16-75
12-16-75
12-16-75
12-16-75

116.8
127.4
115.7
80.6
116.4

2.1
1.9
2.1
-10.3
2.1

9.1
5.4
2.8
-3.9
17.6

-4.0
.9
-11.7
-3.7
-4.7

Consumer prices (1967 = 100)
Food
Commodities except food
Services 2 /

Nov.
Nov.
Nov.
Nov.

12-19-75
12-19-75
12-19-75
12-19-75

165.6
180.9
152.1
172.0

8.2
6.7
3.2
13.4

7.3
7.9
3.7
11.0

7.3
7.2
6.4
8.4

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

Dec.
Dec.
Dec.

1-9-76
1-9-76
1-9-76

179.7
177.3
186.7

-5.0
7.2
-30.1

5.4
9.8
-8.2

4.2
6.0
-.3

Personal income ($ billion)3/

Nov.

12-17-75 1290.1

10.2

10.9

8.9

Nov.

(Not at Annual Rates)
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries
Nondefense
Defense

Nov.
Nov.
Nov.
Nov.

12-31-75
12-31-75
12-31-75
12-31-75

41.3
12.1
10.6
1.5

-2.6
1.6
-1.3
27.8

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

Oct.
Nov.
Oct.

1-9-76
12-31-75
1-9-76

1.52
1.69
1.37

1.531.67 1.36-

1/
1.561.721p
1.35-

Nov.

12-31-75

.845

1/
.838-

1/
.828-

Retail sales, total ($ bil.)
GAF

Dec.
Dec.

1-9-76
1-9-76

52.1
13.4

3.5
4.2

Auto sales, total (mil. units)3/
Domestic models
Foreign models

Dec.
Dec.
Dec.

1-7-76
1-7-76
1-7-76

9.6
8.2
1.4

8.9
7.8
15.6

4/
Plant & equipment expen. ($ bil.)All industries
Manufacturing
Nonmanu fac turing

1976
1976
1976

1-13-76
1-13-76
1-13-76

Housing starts, private (thous.)3/

Nov.

12-16-75

Ratio:

Mfrs.' durable goods inventories to unfilled orders

Leading indicators (1967 = 100)
Nov.
1/ Actual data. 2/ Not seasonally adjusted.

119.68
50.71
68.98
1375

12-30-75
102.5
At annual rate.

-3.3
-2.9
1.5
-25.4

5.1
6.7
5.1
10.8
-19.6

-5.6

-8.4

-3.3
-6.9
-.7
-35.0
1/
1 54.
1.721.42-

.722
15.5
17.6
33.9
35.8
23.3

5.5
5.0
5.8
35.2

.4
-.1
5.6
Planned-Commerce
Nov. survey

1/
/

II - 1

DOMESTIC NONFINANCIAL DEVELOPMENTS
Recent data suggest a resumption of growth of economic activity
following a short pause.

Retail sales and industrial production recorded

a sizable advance in December, following comparatively moderate advances
in October and November.

Increased activity in December was accompanied

by strong employment gains and longer workweeks.
Indicators of investment spending continue disappointing; both
new orders for capital equipment and building contracts for business
structures declined in November and have yet to show signs of a sustained
recovery.

Moreover, the Commerce survey of business spending plans

suggests a very slow expansion of spending--5-1/2 per cent in nominal
terms for the year as a whole.
Wholesale prices were down slightly in December, owing to a
further decline for raw and processed agricultural products.

However, prices

of industrial commodities continued to rise rapidly in December, despite
low rates of capacity utilization and the moderate pace of recovery.
Industrial production is estimated to have risen by 1 per cent
in December, about double the upward revised November increase of half
a per cent.

December gains were widespread and strong.

Business equipment

production, which had risen only moderately from the spring low through
November, is estimated to have moved up nearly 1 per cent in December.
Production of consumer goods also is estimated to have risen about as
much as the overall index.

Widespread advances in the materials and

intermediate products groups again contributed heavily to the overall
advance of output.

II -

Auto assemblies edged up to a [7.8]million unit annual rate in
December and, reflecting the brighter sales picture, producers have
tentatively scheduled production at an 8 million unit annual rate for
the first quarter.
Capacity utilization in major materials is estimated to have
edged up to 81 per cent in December reflecting a rise for the durable
goods component.

Capacity utilization in manufacturing as a whole also

is estimated to have risen in December but remains far below the 1973
high, reflecting the moderate recovery to date of durable goods
production.
Nonfarm payroll employment, which had leveled off temporarily
Expansion resumed in trade

in November, rose by 240,000 in December.

(76,000) and State and local government (43,000), after having hesitated
noticeably in November.

Manufacturing employment rose by about 60,000

(after allowance for changes in strikes) and the average workweek jumped
by 0.4 hours.

The reported increase in hours may overstate the actual

rise, however, because of faulty seasonals.
Despite employment gains totaling about 1-1/2 million since
mid year, payroll employment remains more than 1 million below the September
1974 peak.

In December, employment in service-producing industries

was up significantly from September 1974 but in construction and
manufacturing, which are heavily staffed by adult men, the job count was
down by 500,000 and 1.5 million, respectively, from September 1974.
Unemployment remained unchanged at 8.3 per cent in December.
Jobless rates rose quite sharply for youths and women, the latter
reflecting a large labor force increase.

For adult men, however,

- 3

NONFARM PAYROLL EMPLOYMENT

(Change in thousands, seasonally adjusted)

Sept. 74
to
June 75

June 75
to
Dec. 75

Nonfarm Total

-2487

1455

Government

+ 392

308

Private

-2879
- 510

Manufacturing

Nov.
to
Dec.

3
-

1147

Construction

Oct.
to
Nov.

240

200

+ 1

-14

-2004

451

-22

Trade

- 266

219

-23

Services

+ 104

380

+32

NOTE:

September 1974 was the specific peak and June 1975
was the specific low for total nonfarm payroll
employment.

THE HOURLY EARNINGS INDEX*
(Percent change compound annual rates based on seasonally adjusted data)

1975
QII
to QIII

QIV 74
to
QI 75

QI
to QII

Private nonfarm

8.6

7.5

8.6

7.7

Construction
Manufacturing
Trade
Services

6.3
9.5
8.9
8.7

8.1
8.9
6.1
4.8

6.6
8.6
8.7
7.3

2.6
8.2
7.0
9.7

QIII
to QIV

*Excludes the effects of interindustry employment shifts
and fluctuations in overtime pay in manufacturing.

II - 4

SELECTED UNEMPLOYMENT RATES
(Seasonally Adjusted)

1974
Dec.

May

1975
Nov.

7.2

9.2

8.3

Men 20 years and over

5.3

7.3

6.9

6.5

Women 20 years and over

7.2

8.6

7.8

8.0

18.1

21.8

18.6

19.9

Household heads

4.6

6.3

5.6

5.7

White

6.4

8.5

7.6

7.5

12.5

14.7

13.8

13.7

4.8

7.0

5.5

4.9

Total

Teenagers

Negro and other races
State Insured*

* Per cent of covered workers.

Dec.

II - 5

net labor force withdrawals in December brough a drop in their unemployment rate.

Total employment of men has shown little net change in

recent months and participation of men in labor markets has continued
to decline during the recovery.
The rate of wage change was about the same between the third
and fourth quarters as earlier in the year.

The hourly earnings index,

which is very volatile from month-to-month, was unchanged in December,
following large increases in October and November.

On a quarterly

average basis, the index was up at a 7.7 per cent annual rate in the
final quarter, compared to annual rates of 7.5 and 8.6 per cent in the
second and third quarters, respectively.

Wages are expected to come

under renewed upward pressure this spring as the collective bargaining
calendar brings major renegotiations covering many more workers than
during 1975.
Judging from the labor market data, total wage and salary
disbursements probably increased strongly again in December.

The rate

of growth of total payrolls had fallen behind the increase in consumer
prices from late 1973 to April 1975.

During that period, real wages

and salaries declined by 7.2 per cent from its peak level.

Between

April and November 1975, however, real payrolls recorded a net gain of
1.6 per cent.

Although the recent gain was less vigorous than for

earlier periods of recovery, it has laid a foundation for continued
expansion of real consumer takings in the months ahead.

II -

CYCLICAL CHANGES IN REAL WAGES AND SALARIES AND PERSONAL INCOME
(Per cent change based on seasonally adjusted data)

Duration

Wage & Salary

Personal

(months)

Disbursements

Income

1975
1971
1961
1958

7
7
7
7

1.6
2.4
3.7
6.2

2.8
4.0
4.2
4.5

1955

4.0

4.4

1975
1970
1960
1958
1954

17
13
5
13
11

-7.2
-2.0
-2.5
-5.6
-3.0

Expansion-First 7 months
Apr.
Nov.
Dec.
Apr.

1975-Nov.
1970-June
1960-July
1958-Nov.

June 1954-Jan.

Contractions
Nov.
Oct.
July
Mar.
July

NOTE:

1973-Apr.
1969-Nov.
1960-Dec.
1957-Apr.
1953-June

-5.2
.4
-1.3
-1.8
-1.3

Per cent changes related to the entire time span and are
not converted to annual rates.
Changes are based on
seasonally adjusted estimates which were deflated by the
Consumer Price Index. Reference months are based on
specific highs and lows for deflated wage and salary component.

II - 7

Reflecting the growth of income, retail sales rose 3.5 per
cent in December, the largest month-to-month increase since July 1973.
Increased spending was particularly evident for the more discretionary
goods.

Sales of the automotive group were up more than 11 per cent and

the GAF group--general merchandise, apparel, appliances and furniture-gained 4.2 per cent in December, following a 3.5 per cent rise in
November.
Despite the strong December rise, the gain in retail sales
in the final quarter was somewhat smaller than earlier in the year.
Present data indicate a 2.3 per cent rise for the quarter (1.9 per cent
excluding autos and nonconsumption items).

Total sales were up 3.4 and

3.9 per cent respectively in the second and third quarters.
Total unit auto sales rose to a 9.6 million unit annual rate
in December, 800,000 above the November sales pace and the highest
rate for the year.

Continuing the pattern of recent months, most of

the improvement was due to stronger sales of domestic models, which
rose up 600,000 units to an 8.2 million unit rate.

Sales of imported

cars, which in recent months have been adversely affected by inventory
shortages, increased competition from U. S. made small cars, and recent
very sharp price increases, rose to a 1.4 million unit rate.

Except

for November, however, this was the lowest sales rate since the
final months of 1974.
Residential construction activity has held the good gains
achieved since last spring.

Private housing starts in November were at

II -

RETAIL SALES
percentage change

(Seasonally adjusted,

from previous period)

III

3.4

3.9

2.3

1.2

Durable
Auto
Furniture and
appliances

3.9
4.6

5.8
7.4

4. 1
4. 0

2.2
3.7

.1
-3.3

11.3

4.9

2.3

6.3

1.2

5.3

1.8

Nondurable
Apparel
Food stores
General merchandise
Gasoline stations

3.1
3.3
1.2
5.5
2.7

3.0
3.0
2.8
2.0
6.6

1.5
- .7
1.7
3.6
-3.5

.8
-. 4
2.7
-1.8
-1.7

.5
.8
.3
3.8
-1.8

2.4
.2
1.2
5.9
- 1.4

Total, less auto and nonconsumption items

3.1

1.9

1.0

2.2

GAF

5.0

2.3

3.3

3.5

4.2

Total sales

Dec.

Oct.

.9
-1.0

3.5
5.9

Real*
.6
.0
n.a.
2.0
1.5
n.a.
*Deflated by an unpublished Bureau of Economic Affairs Drice measure.

(Millions of units,

AUTO SALES
seasonally adjusted

annual rates)

III

Oct.

Nov.

Dec.

9.2

8.8

9.6p

Imports

1.7

1.3

1.4

1.2

1.4 p

Domestic models

7.5

7.9

7.8

7.6

8.2

Total auto sales

Large

3.6

4.1

4.5

n.a.

4.2

4.3

n.a.

Small

3.0

2.2

2.9

n.a.

3.6

3.3

n.a.

II - 9

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

Per cent change in
Nov. from:
Month ago Year ago

QII

1975
Oct.
QIII

.69

.90

1.04

1.08

1.12

+ 4

+45

1.00

1.07

1.26

1.46

1.38

- 6

+35

.75
.25

.84
.22

.95
.31

1.10
.36

1.03
.35

- 7
- 2

+28
+62

Under construction1/

1.12

1.04

1.07

n.a.

+ 3

Completions

1.39

1.22

1.27

1.09

n.a.

2
-14 /

.20

.21

.23

.24

+ 3

Permits
Starts
1-family
2-or more-family

MEMO:
Mobile home shipments

1/ Seasonally adjusted, end of period.
2/ Per cent changes based on October.
NOTE--indicates change of less than 1 per cent.

Nov. (p)

-19
332/

+15

II - 10

a seasonally adjusted annual rate of 1.38 million,off slightly from
October, but the highest rate since the spring of 1974.

Moreover,

mortgage commitments outstanding and residential building permits
increased in November.

Single-family starts were off somewhat in

November from the sharply advanced October level while multi-family
units held near their improved October performance.
Starts probably averaged somewhat above 1.4 million units in
the final quarter, marking the third quarter of recovery from a cyclical
low of 1 million unit annual rate in the first quarter.
Recent data suggest that the decline in business investment
spending has bottomed out.

However, the strength of the prospective

upturn has been called into question by the new Commerce survey of
anticipated business capital spending plans for 1976, which indicates
expected nominal spending increases of only 5-1/2 per cent.

This

figure falls between the results of the McGraw-Hill survey (8.8 per
cent) and the Edie survey (2.9 per cent).

This particular Commerce

survey, which is only six years old but has a good track record for
that period, suggests heavy spending by utilities (18 per cent), a
moderate advance in the nondurable manufacturing industries (about
8-1/2 per cent) and no change for durables manufacturing, where
demand and production continue relatively slack.

Prices of plant

and equipment purchased in 1976 are expected by business to rise by
nearly 10 per cent, suggesting a real decline if investment spending
is not scaled up significantly from advance expectations.

Such an

upgrading of plans is, of course, typical of cyclical recovery periods.

II-

New Orders Received by Manufacturers
(Per cent change based on seasonally adjusted data)

August 74
to
March 75
Total Durable Goods

August 75
to
Nov. 75

-26.9

Capital Goods

18.7

-3.3

-22.8

15.2

0.2

-19.3

Excluding Steel and Autos
Nondefense

March 75
to
August 75

9.1

1.5

Contracts for Business Structures and New Orders
(Per cent change from previous period)

1974

1975 1/

-15.0

-33.3

Commercial

-18.3

-27.1

Industrial

-15.3

-38.6

2/
Contracts for Business Structures-

-----------------------------------------------7.7

-10.4

Excluding Steel and Autos

10.0

-10.2

Nondefense Capital Goods Orders

11.7

-11.0

Durable Goods Orders

1/The average for 1975 is

based on data through November.

2/
2/Construction contracts for commercial and industrial buildings as
measured by square feet of floor space.

II - 12

Survey Results of Anticipated Plant
and Equipment Expenditures
(Per cent change from prior year)

1976
1/
1975-

2/
CommerceMcGraw-Hill

3/
Rinfret-Boston-

3/
Edie-

1.0

5.5

8.8

13.5

2.9

Manufacturing

5.0

8.4

16.5

1.3

Durables

-2.5

0.8

1.0

5.7

-2.8

Nondurables

12.3

8.4

14.7

25.7

4.7

-1.8

5.8

9.0

11.3

4.2

Mining

20.3

-4.1

20.6

39.4

5.8

Railroad

-0.1

-9.9

-2.0

22.2

-6.2

Other Transportation

15.0

-13.9

-1.1

-23.9

-34.5

Electric Utilities

-3.4

17.7

13.0

18.3

15.6

Gas and Other Utilities

12.3

20.1

32.1

34.3

23.1

Communications

-6.2

13.3

7.0

4.9

6.3

Commercial and other

-6.3

0.8

5.0

7.4

0.1

Material Producers

17.7

6.5

12.1

20.6

2.5

Other Producers

-8.3

2.9

3.4

11.3

-0.4

All Industries

Nonmanufacturing4/

Addenda:

Results of BEA plant and equipment survey taken in late October and November.

Survey taken in late November and December 1975, corrected for systematic bias.

3/ These surveys were made available to the Board on a strictly confidential basis
and their results should be restricted to internal use only.
4/

Includes industries not shown separately.

II - 13

New orders received by manufacturers of durable goods fell by
2.6 per cent in November with the shortfall concentrated among producers of
iron and steel and motor vehicle manufacturers and suppliers.

Exclusive of

autos and steel, orders held near their August 1975 level.
Nondefense capital goods orders fell by 1.3 per cent in November
and the backlog of unfilled orders declined for the thirteenth consecutive
month.

Capital goods orders have shown no indications of a sustained

rise since the spring.

In real terms, these orders are estimated to

have dropped by about one-third from their cyclical peak and to be up by only
5 or 6 per cent from their March 1975 low.
The outlook for business fixed investment was also clouded by
a sharp decline in contracts for commercial and industrial buildings
(measured in square feet), which offset the increases of the two
previous months.

Every major category of construction recorded a

substantial decline in November.

This measure of future expansion

of business structures is at its lowest level since 1963.
Business inventory decisions remain conservative, but inventory
liquidation in manufacturing is apparently nearing an end.

The book value

of manufacturers' inventories rose at a $2.4 billion annual rate in November.
October estimates were also revised up and now show a slight rise.

The

book value of inventories held by producers of durable goods declined in
November for the ninth successive month, but the runoff was only at a $2.8
billion annual rate--slower than October and well below the third quarter
rate.

Accumulation of nondurable goods stocks continued for the fourth

consecutive month.

Some additional liquidation of durables is expected but

the reduction has been quite sharp and the turn to accumulation may occur
earlier than in the recovery from the 1953-1954 recession (12 months) or
from the 1957-1958 recession (11 months).

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

1975
I

III

Oct.

Nov.

Manufacturing and trade
Manufacturing
Durable
Nondurable

-10.4
3.2
7.6
-4.5

-18.8
-12.5
-4.3
-8.2

5.4
-6.6
-8.6
2.0

21.4
1.2
-5.1
6.3

n.a.
2.4
-2.8
5.3

Trade, total
Wholesale
Retail
Auto

-13.6
-4.1
-9.4
-8.3

-6.3
-2.7
-3.6
-1.7

11.9
3.1
8.8
5.5

20.2
1.1
19.1
4.0

n.a.
-2.7
n.a.
n.a.

INVENTORY RATIOS

1974
Oct.
Nov.

1975
Oct. Nov.

Inventory to sales:
Manufacturing and trade
Manufacturing total
Durable
Nondurable

1.54
1.66
2.06
1.21

1.59
1.72
2.16
1.24

1.52
1.67
2.19
1.15

n.a.

Trade, total
Wholesale
Retail

1.42
1.21
1.59

1.46
1.22
1.66

1.37
1.22
1.49

n.a.
1.23
n.a.

Inventories to unfilled orders
Durable manufacturing

.705

.722

.838

.845

1.69
2.26
1.14

- 15

Wholesale prices declined 0.4 per cent in December as a second
consecutive monthly decline of farm and food products (off 2.5 per cent)
more than offset a rise of 0.6 per cent in industrial commodities prices.
Increases were widespread for industrial commodities with fuels, textiles,
apparel, building products and papers contributing to the overall increase.
Wholesale prices rose by 4 per cent over the year ending in December,
a dramatic improvement over the 1974 rise of nearly 21 per cent.

average, prices of farm and food products were about the same as a
year earlier, while prices of industrial commodities were 6 per cent
higher chiefly reflecting higher prices for fuel, machinery and equipment, transportation equipment, and chemicals.

Industrial commodity

price increases were comparatively moderate until just before mid-year,
a period of slack demand and inventory liquidation.

But this was

followed by increases at an 8.7 per cent (annual rate) from June through
year end.
In November, consumer prices rose 0.7 per cent on average (not
annualized).

Services rose by 1.1 per cent over the month.

Food prices

increased at less than half the October rate (0.6 per cent), while the
rise in nonfood commodities was a moderate 0.3 per cent for the third
successive month.

Categories recording the largest increases in

November included auto insurance premiums (which accounted for about
one-seventh of the November CPI rise), mortgage interest rates, gas,
electricity and new car prices.

Overall consumer prices rose at a

7.7 per cent rate between June and November--up from the 6.6 per cent
rate of increase over the first half of the year.

WHOLESALE PRICES
(Per cent changes at annual rates; based on seasonally adjusted data)1/

Relative
importance
Dec. 74

Dec. 73
to
Dec. 74

Dec. 74
to
Dec. 75

Dec. 74
to
June 75

100.0

20.9

4.2

Farm and food products

29.1

11.0

-0.3

Industrial commodities
Materials, crude and
intermediate
2/

70.1

25.6

46.0

All commodities

Finished goods
Consumer nonfoods
Products goods

June 75
to
Dec. 75

Nov. 75
to
Dec. 75

8.3

- .5.0

-8.0

8.1

-30.1

6.0

3.4

8.7

7.5

28.2

5.3

2.1

8.6

9.7

17.5
8.6

20.5
22.6

6.7
8.2

3.9
8.4

9.6
7.9

3.8
2.1

13.4

13.0

5.5

3.8

7.2

Memo:
Consumer foods

-15.3

1/ Not compounded for one-month changes.
2/ FR estimate.
CONSUMER PRICES
(Per cent changes at annual rates; based on seasonally adjusted data)1/

Relative
importance
Dec. 74

Dec. 73
to
Dec. 74

Dec. 74
to
Nov. 75

Dec. 74
to
June 75

June 75
to
Nov. 75

100.0

12.2

7.1

6.6

7.7

8.2

Food
Commodities (nonfood)

24.8
39.0

12.2
13.2

6.7
6.3

4.7
6.6

9.2
5.9

6.7
3.2

Services

36.2

11.3

8.1

7.1

9.4

68.3

11.3

6.7

6.8

6.6

4.4
2.5

22.8
19.6

10.7
14.8

9.0
17.6

12.7
11.5

All items

Oct. 75
to
Nov. 75

13.4

Memo:
All items less food
and energy 2/3/
Petroleum products2/
Gas and electricity

8.4
3.8
10.2

1/ Not compounded for one-month changes.
2/ Confidential -- not for publication.
3/ Energy items excluded: gasoline and motor oil, fuel oil and coal, and gas
and electricity.

II - 17

State and local government demands continue to be stronger than
anticipated several months ago.

Employment growth has continued at a

strong pace since mid year--expanding at an annual rate of about half
a million--and new construction spending has held up.

Indeed, recent

preliminary data suggest that the value of construction spending put-inplace probably increased in the fourth quarter rather than showing the
expected decline.

Nevertheless, the recent problems of New York, high

municipal interest rates, and tight budget positions are expected to have
a dampening influence on State and local spending through the first half
of next year.
On the Federal government side, the recently signed Revenue
Adjustment Act of 1975 provided tax relief roughly in conformance with
staff assumptions.

The legislation temporarily extends the tax reductions

enacted in early 1975 and continues 1975 withholding rates through
June.

(A detailed description of this legislation is presented in the

Appendix.)

The staff is now projecting a fiscal year 1976 unified budget

deficit of about $73 billion, up by $2.5 billion from the last Greenbook
projection.

Unified outlays for FY 1976 have been revised upward by

$2.0 billion to $372 billion.

In early December, the Interior Department

raised only $0.4 billion from its sale of offshore oil leases, approximately
$2 billion less than was anticipated (receipts from the sale of oil leases
are treated as an offset to outlays).

Our estimate of outlays is nearly

$3 billion below the $374.9 billion target set by the Congress in the
Second Concurrent

esolution of December 11, 1975.

The major differences

are due to assumptions about Congressional spending initiatives for
special revenue sharing and public service employment.

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

Latest data
Level
Period

Indicator

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1
M2
M3
Time and savings deposits
(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs + Credit
Bank credit (end of month)

-. 3
-1.0

296.3
667.5
1093.9

-3.2
3.2
5.6

2.2
6.8
8.5

4.2
8.8
11.4

371.3
83.3
426.4
720.7

8.8
1.9
9.6
-8.8

10.6
4.2
11.2
2.6

12.8
-7.0
15.8
4.2

Dec.
Dec.
Dec.
Dec.
Dec.
Unions) Dec.
Dec.

1/9/76
1/8/76
1/12/76
1/17/76
1/12/76

Credit demands

SAAR (per cent)
14.8
8.32.7

35.1
32.8

1/7/76
1/7/76
1/7/76

Year
ago

5.0

Dec.
Dec.

Market yields and stock prices
deral funds
wk. endg.
asury bill (90 day)
ommercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
FNMA
auction yield
(FHA/VA)
Dividends/price ratio
(Common
stocks)
wk. endg.
NYSE index (12/31/65=50)
end of day

Net change from
Three
Month
ago
months ago

Percentage or index
-. 13
5.12
5.17
-. 45
5.44
-. 49
8.85
-.52
7.13
-. 21
9.13
-. 19
3.91
50.99

-. 26
-4.73

Net change or

Current month
1974
1975

points
-. 94
-1.16
-1.39
-. 75
-. 35
-. 82

-2.58
-1.51
-2.99
-. 77

.14
-. 24

-1.34
-12.55

-. 31
-3.66
gross offerings
Year to date
1975

1974

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)
U.S. Treasury (net cash borrowing)

Dec.
Nov.
Oct.
Dec.

-1.4
.8
5.2
1.8e

-1.7
-. 4

Dec.

2.le
.9
1976
6.1e
15.5

1.5
.8
1975

Dec.
Jan.

Total of above credits
e - Estimated

2.8
2.1

3.7
8.8

-5.0
2.3
34.5
32.6e

27.5
10.8
38.8
25.3

30.4e
2.2
1976
6.le
103.1

24.2
16.6
1975
3.7
146.9

III

DOMESTIC FINANCIAL DEVELOPMENTS
A generally bullish atmosphere has prevailed in financial
markets since the mid-December FOMC meeting.

Incoming data have rein-

forced the growing market view that the economy has entered a period of
moderate growth during which the external financing requirements of
businesses will be rather small and private credit demands as a whole
will not be so large as to place strong upward pressure on interest
rates.

In addition, the sluggish behavior of the monetary aggregates

during December--leaving the trend of narrowly defined money below the
announced 5 to 7-1/2 per cent growth path--fostered a widespread
expectation that the System would be operating to achieve easier money
market conditions over the near-term.

The reduction in reserve require-

ments announced on December 24 and the subsequent decline in the Federal
funds rate to less than 5 per cent provided further basis for this
expectation.
With demands for business credit no more than seasonal, and
with banks, insurance companies and other financial institutions fairly
flush with investible funds, market rates of interest have fallen
significantly during the intermeeting period--in many instances moving
through the lows of 1975.

Money market instruments have posted yield

declines ranging from 5/8 to

percentage point,

registering the largest reductions.

with CD rates

Most long-term yields have

fallen roughly 1/4 to 1/2 percentage point.

In the stock market, a

strong rally has lifted the Dow-Jones industrial average to about
915, its highest level in more than 2 years.

III -

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

Dec. '74
FOMC
Dec. 17

Oct.'75
FOMC
Oct. 21

Nov.'75
FOMC
Nov. 18

Dec.'75
FOMC
Dec. 16

Dec. 30

Jan. 6

Jan.13

Short-term
Federal funds1 /

8.72

5.73

5.24

5.17

5.18

5.12
5.12

4.76
4.76-

Treasury bills
3-month
6-month
1-year

6.77
6.90
6.57

5.66
6.04
6.28

5.47
5.80
6.12

5.51
5.94
6.28

5.18
5.46
5.72

5.15
5.38
5.62

4.83
5.09
5.37

Commercial paper
1-month
3-month

9.50
9.25

5.75
6.13

5.38
5.75

5.50
5.88

5.50
5.75

5.13
5.38

4.63
5.13

9.15
8.63

6.38
6.88

6.13
6.70

6.10
6.70

5.55
5.88

5.45
5.88

5.00
5.40

7.38

7.17

6.88

6.95

6.42

n.a.

10.50

8.00

7.50

7.25

9.59
9.57

9.53
9.41

9.11
9.24

9.37
9.25

9.13

9.10

8.98p

7.15

7.29

7.43

7.34

7.30

7.29

7.13

7.82

8.26

8.36

8.22

8.02

7.99

n.a.

846.82
855.24
597.54
Dow-Jones
844.30
852.41
N.Y.S.E.
35.58
47.91
48.15
46.84
47.37
Keefe Bank Stock
403
488
494
449
-1/ Weekly average.
2/ Highest quoted new issues.
3/ One day quotes for preceding Thursday.
4/ Average for first 6 days of statement week ending January 14.
n.a.--not available.
p--preliminary.

890.82
49.51

912.94
50.61

Large neg. CD's
3-months
6-months

Federal agencies
1-year
Bank prime rate

n.a.
7.00

Long-term
Corporate 1/
New AAA -3
Recently offered

8.85p

Municipal
(Bond Buyer)U.S. Treasury
(20-year constant
maturity)
Stock prices

520

III - 3

Monetary Aggregates
M1 declined at a 3.2 per cent annual rate in December, on a
quarterly average basis, this aggregate grew at only a 2.2 per cent
annual rate during the final 3 months of 1975.

Even after allowance

for the likelihood that the shifting of business funds from demand to
newly authorized savings deposits accounted for part of the December
weakness, the behavior of M1 relative to interest rates and economic
activity over the past several months remains unusual.

The staff has

undertaken a number of studies in an attempt to discover factors that
might explain the recent wekaness of the money stock; to date this
research has been successful in accounting for only a small part of the
shortfall in M1.
Growth of M 2 and M 3 slowed markedly in December--and not solely
because of the decline in M1.

At commercial banks, time and savings

deposits other than large CD's grew at an 8.8 per cent annual rate as
compared with a 13.2 per cent rate in November.

This deceleration seems

notable because a sizable portion of the December rise--perhaps as much
as 3 or 4 percentage points--is estimated to have resulted from inflows
to corporate savings accounts.

Since deposit growth at nonbank thrift

institutions appears to have slowed only slightly in December from the
strong pace of the preceding month, the weakness in time and savings
deposits (ex. large CD's) at commercial banks is surprising.

Heavy

consumer purchases over the holidays, or the shift of funds to common

III -

MONETARY AGGREGATES
(Seasonally adjusted changes)

1975
1/
1/
1/
HI-- HII- QIII-

1/
QIVOct.

Nov.

Dec.p

Twelve
months
ending
Dec.
1975 p.

Per cent at annual rates

4.2

6.9

2.3

-2.4

12.2

8.5

9.7

10.4

6.4

4.2

12.9

10.9
Adjusted bank credit proxy

6.2

12.4

13.2

8.7

7.4

12.4

4.8

3.4

1.4

5.9

5.0

12.8

9.1

6.3

4.9

10.0

13.9

11.3

12.3

12.6

13.2

9.8

9.6

13.2

17.6

16.1

18.6

13.0

14.4

12.0

10.1

11.6

8.4

21.1

n.a.

17.1

n.a.

-3.2

5.6

11.4

Time and savings deposits
at commercial banks:
a.
b.

Total
Other than large
CD's

12.3
8.8

12.8

13.2

11.0

17.6

8.2

8.A

17.4

16.5

8.4
n.a.

11.3
19.72l

Deposits at nonbank thrift
institutions:
a.
b.
c.

Savings and loan
associations/
Mutual savings
banksi/
3/
Credit unions-

dollars4/

Billions
Billions of dollarsof
Memoranda:
a.
b.
c.

U.S. Government
demand deposits
Negotiable CD's
Nondeposit sources
of funds

.3
-1.0

-.1 -0.2
-.1 -1.7

1.4

-0.2
2.2

0.7
0.1

0.5

0.9

0.3

-0.5
1.9

1/ Except where otherwise defined, growth rates are based on changes in the average
amounts outstanding for the period.
2/ M is defined as M plus credit union shares, mutual savings bank deposits, and
shared of savings and loan associations.
3/ Based on month-end series incorporating new (Dec., 1975) seasonal factors.
4/ Changes in average levels month-to-month or average monthly change for the period,
measured from last month in period to last month in period, not annualized.
5/ For the twelve months ending November 1975.
p - Preliminary.
n.a. - Not available.

III -

stocks, could have led to some decline in consumer-type time and savings
deposit growth, but such an explanation is not easily reconciled with
the disparity in the experience of banks versus nonbank thrift institutions.
However, nonbank thrift institutions probably were more successful than
banks in attracting year-end IRA contributions because of the differential
in deposit rate ceilings.
Negotiable CD's at large commercial banks rose nearly $2 billion
in early December and remained essentially unchanged thereafter.

Rates

on CD's of all maturities have fallen 3/4 percentage point or more since
mid-December, thereby reducing the wide spreads that had developed
between CD and Treasury bill yields when the New York City financial
crisis caused investors to reappraise the riskiness of bank liabilities.
Recent reports indicate, moreover, that the major New York City banks no
longer must pay higher rates for CD funds than do large regional banks,
although they still have not regained their previous favored position
in this market.
Business Credit
Previous staff projections had indicated that rapidly improving
cash flows would about cover business spending on inventories and fixed
capital during the second half of 1975.

These projections also suggested

that businesses would continue to float a considerable volume of longterm debt and equities in order to strengthen balance sheet positions,

III -

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

1975p

QII

QIIIp

QIVp

Oct.p

4.2

5.7

4.6

3.6

2.6

6.0

10.5

-8.8

59.0

79.5

95.0

26.0

2.6

-31.1

19.2

20.4

Other securities

3.3

7.1

3.9

1.7

14.2

9.9

-18.8

Total loans

-.9

-6.7

2.8

9.5

9.4

-10.3

-2.7
2.2
n.a.

-3.5
3.1
-6.9

-9.8
1.2
-6.5

-.3
5.7

10.7
5.5
7.0

6.0
2.7
1.4

-3.8

-1.6 -12.1

-.6

1.9

2/
Total loans and investmentsU.S. Treasury securities

2/
Business loansReal estate loans
Consumer loans4/

2.5
4.3
n.a.

Nov.p

Dec.p

-9.2
4.5
n.a.

Memo:
Business loans plus
nonfinancial commercial
paper3/

-1.0

-5.6

1/ Last Wednesday-of-month series except for June and December, which are adjusted
to the last business day of the month.
2/ Includes outstanding amounts of loans reported as sold outright by banks to
their own foreign branches, non-consolidated nonbank affiliates of the bank
holding companies (if not a bank), and non-consolidated nonbank subsidiaries
of holding companies.
3/ Nonfinancial commercial paper is measured from end-of-month to end-of-month.
4/ Consumer loans revised in accordance with major revisions in consumer credit
statistics.
p - Preliminary.
n.a. - Not available.

III - 7

with the proceeds used to repay short-term debt or to acquire liquid
assets.

Recent business credit developments have been broadly consistent

with this pattern.

In December, business loans at commercial banks declined $1.6
billion (seasonally adjusted) despite an increase of more than $1 billion
in bank holdings of acceptances.
firms rose only $500 million.

Commercial paper issued by nonfinancial

Hence, total short-term business credit

outstanding fell at a 7 per cent annual rate during the month, leaving
this aggregate slightly lower at year-end, on a seasonally adjusted basis,
than it was at mid-year.

The weakness in short-term credit demand helped

push commercial paper rates in early January below their 1975 lows and
precipitated a decline in the bank prime rate to 7 per cent,
Interest rates on corporate bonds have also fallen below their
1975 lows, aided in part by the forecasts of a number of prominent market
analysts that the volume of long-term debt sold by businesses in 1976
will be sharply lower than in the past year.

During December, gross

public bond offerings by domestic corporations totaled $1.75 billion-about the same volume as in November but significantly lower than the
average of the preceding 10 months.

Some further slackening in the

pace of long-term debt issuance currently appears to be in prospect for
January and February; continued strength of the bond markets could,
however, lead some firms to enlarge scheduled issues or to advance
issues now tentatively planned for later months (as occurred to a minor
extent during the first week of January).

III - 8

In recent months, companies with bond ratings of A or less-primarily utilities and financial firms--have accounted for most of the
new issue volume.

This is in sharp contrast to the pattern observed

earlier in 1975 when industrial firms with ratings of Aaa and Aa
dominated the bond calendars.

The change in the composition of offerings

may be largely attributable to a relatively greater need by lower-rated
firms for additional balance sheet restructuring, but it also reflects
the more receptive market for the debt of such companies.
A record volume of foreign bonds was sold in December as the
World Bank marketed a $750 million offering.

Foreign bond issuance is

expected to run ahead of the average 1975 pace during January and
February.

Because the Canadian government is maintaining relatively

stringent credit conditions as part of its anti-inflation and balance
of payments policies, Provincial governments and public utilities in
that country continue to find the U. S. market attractive on the basis
of cost as well as size.
Other Securities Markets
Yields on Treasury securities have fallen fairly steadily
since mid-December.

Banks made sizable purchases of Treasury securities

in December, as the contraction of loan portfolios and a decline in
holdings of tax-exempts released funds for such investment.

Additional

support for the Government market has been provided by System open

III -

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

1975
QIV.
Yeare / ar QI

Nov..1

1976
Dec.
Dec.

Jan.
Jan.

Feb.
Feb.±

Gross offerings

4,358

3,958

3,750

3,550

3,150

3,050

2,717

1,946

1,700

1,750

1,600

By quality
1/
Aaa and Aa
Less than Aa-

1,422
1,295

776
1,170

650
1,050

625
1,125

By type of borrower
Utility
Industrial
Other

925
1,432
360

Corporate securities--Total
Publicly offered bonds

Privately placed bonds
Stocks
Foreign securities--Total
Canadian
Other

625
675
450

743
898
3?/
/

State and local government
securities
Long-term
Short-term

946
1,066

451
213
238

2,217
2,266

1,000
800

634
251
383

2,535
2,433

1,200
850

750
800
580
380
200

2,331
2,101

2,050
2,000

2,100
2,000

2,000
2,000

7,700
594

6,900

Net Offerings
2/
U.S. TreasurySponsored Federal Agencies

e/
f/
1/
2/

7,326
2,247

7,9314 /
1,758

4,083
352

9,850 e /
463

Estimated.
Forecast.
Bonds categorized according to Moody's bond ratings.
Includes only publicly offered issues of marketable securities.

604

III - 10

market operations.

In meeting seasonal reserve needs during the latter

half of December, the Desk purchased $2 billion of Treasury bills and
$300 million of coupon issues.
The staff projects Treasury borrowings of $27 billion in the
first 3-months of 1976--a record for any quarter.

The Treasury began

its task by auctioning $2.0 billion of 4-year notes on December 22 for
settlement on January 6, and then took further advantage of the strong
market rally with the unexpected announcement of a $2.0 billion, 64month note issue, auctioned on January 13.

An additional $900 million of

new money was obtained through the sale of $2.5 billion of 2-year notes
on January 14.
Yield indexes for tax-exempt obligations declined in early
January, but the improvement was concentrated among highly rated issues.
Quality spreads have widened somewhat since the last FOMC meeting.
Investors have had to contend not only with the special problems of
units in New York State, but with the broader implications of the New
York City moratorium and pending bankruptcy legislation.

Underwriters'

uncertainty regarding the extent of disclosure required by law has
prevented some units from marketing obligations.

Nevertheless, about

$2 billion of State and local issues were sold in December, and comparable volumes are expected in January and February.

III - 11

Mortgage and Consumer Credit
The average interest rate on new commitments for conventional
mortgages at savings and loan associations has continued to edge downward; on January 9 it stood at 9.07 per cent, 18 basis points below the
recent high of late October.

With deposit inflows remaining strong,

S&L's generally have reported the supply of mortgage funds to be
adequate relative to demands for funds at going interest rates.

these institutions--which dominated the private mortgage market to an
unusual degree throughout 1975--estimated new commitments picked up
somewhat in November, and commitments outstanding rose to more than
$18 billion, a level 50 per cent above the cyclical low and the
highest since mid-1973.
With 9 per cent FHA/VA mortages selling close to par in the
secondary market, the ceiling rate on Government-underwritten singlefamily home loans was cut to 8-3/4 per cent on January 5.

On January 6,

the Administration announced the release of $3 billion for GNMA
purchases of FHA-insured mortgages on new rental apartment projects.
These mortgages will bear below-market interest rates of 7-1/2 per
cent, and GNMA will begin issuing commitments on January 26.
The rate of expansion of consumer instalment credit outstanding
was virtually unchanged in November from the average pace of the preceding 4-months.

Automobile loans were the strongest component,

accounting for half of the November increase.
leading institutional lender.

Credit unions were the

III -

CONSUMER INSTALMENT CREDIT

New-car
finance rates2/
Open-end
APR at
share 1/ finance companies
(Per Total, SAAR
Bank share
cent) (S ------ ~~-'
billions) (Per cent) (Per cent)
(Per cent)
-- ~~-~ '~
--~~-'
Credit
extensions

Change in
outstandings (SAAR)
($ billions)
1974 -

11.1

II
III
IV

14.4
14.3
-1.7

7.6
9.7
9.4
-1.1

165.2
171.2
171.3
156.4

43.8
43.5
43.9
43.5

27.7
27.6
29.2
31.9

12.29
12.50
12.84
13.10

II
III

-3.1
-1.6
9.1

-2.0
-1.0
5.8

155.3
159.1
173.2

43.7
43.6
44.3

31.2
31.0
29.9

13.07
13.09
13.18

Oct.
Nov.

1975 -

10.0
9.6

6.4
6.1

178.0
178.5

43.9
44.4

30.9
29.6

13.15
13.15p

1/ Open-end credit consists of extensions on bank credit-card and check credit plans, and
retail "other consumer goods" credit extensions.
2/

New-car finance rates are end-of-period.
All data are revised, except for new-car finance rates.

III - 13
INTEREST RATES AND SUPPLY OF FUNDS FOR
CONVENTIONAL HOME MORTGAGE
AT SELECTED S&L's

End of period

Number of
Federal Home Loan Bank
Districts with funds
in short supply

Basis point
change from
previous
week

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

1974--High
Low

10.03
8.40

---

12
0

1975--High
Low

9.59
8.80

---

10
0

Dec.

5
12
19
26

9.12
9.12
9.08
9.09

0
0
- 4
+ 1

1
1
0
0

Jan.

2
9

9.10
9.07

+ 1
- 3

1
0

SECONDARY HOME MORTGAGE MARKET ACTIVITY

FNMA AUCTIONS OF FORWARD PURCHASE COMMITMENTS
Conventional
Amount

($ millions)
Offered Accepted

Govt.-underwritten

Yield
to
FNMAI/

Yield
Amount
to
($ millions)
FNMAI
Offered Accepted

Yields on GNMA
guaranteed mortgagebacked securities
for immediate
delivery 2/

1974--High
Low

10.71
8.47

1,155
26

10.59
8.43

9.98
7.79

1975--High
Low

10.02
8.96

643
25

9.95
8.78

9.10
8.01

Dec.

L
15
29

9.38
9.36
9.35

256
287
95

9.32
9.31
9.29

8.57
8.63
8.40

Jan.

9.28

9.13

8.34

I/ 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 prepayme nt
period of 12 years for 30-year loans, without special adjustment for FNMA commitmenl
t
fees and FNMA stock purchase and holding requirements on 4-month commitments. Mort 1
gage
amounts offered by bidders relate to total bids received.
2/ 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.

CONFIDENTIAL
IV - T -

(FR)

1
January 14, 1976

U.S. International Transactions
(In millions of dollars; seasonally adjusted)

19Q7

1.
2.
3.

Trade balance
Merchandise exports
Merchandise imports

4.
5.

Net service transactions
Balance on goods and services 1/

1 9 7 5

YEAR
Q-1
Q-2
0-3
-5,277 1,830 3,378 2,026
98,309 27,188 25,692 26,716
03,586 25,358 22,314 24,690
9,102

1,348

1,637

2,521

3.825

3.178

5,015

4,547

Remittances and pensions
Gov't grants and capital, net

-1.721
-4,342

-448
-462
-426
-1,201 -1,075 -1184

Bank-reported private capital, net change
Claims on foreigners (inc. -)
Short-term
Long-term
Liabilities to foreigners (inc. +)
Long-term liabilities
Short-term liabilities
2/
to commercial banks abroad
(to which liab. to branches) 3/
to other private foreigners
to int'l regional organizations

-2.663

-5,609 -4.416

19,482(-3,727(-3,782
18,307 -3,329 -3,421
-1,175
-398
-361
46,819)(-,882
(-634)
9
-39
-287

16,810 -1,843

U.S. direct investment abroad, (inc. -)
Foreign direct investment in U.S., (inc. +)
Nonbank-reported: liquid claims, (inc. -)
other claims, (inc. -)

-347

-7,455

-1.041

895
(319)
-217
-2.304

340
318
231

679
126
-110

1,493

272

313

Changes in liab. to foreign official agencies
OPEC countries (inc. +) 3/
Other countries (inc. +)

9.831
10,025
-194

3,586
270
3,316

Changes in U.S. reserve assets (inc. -)

-1.434

-325

-29

-172
-1,265
3

-4
-307
-14

-16
-7
-6

4.698

2.067

843

Gold
Special drawing rights
Reserve position in the IMF
Convertible currencies
Errors and omissions

Memo:
Official settlements balance, S.A.
N.S.A.
O/S bal. excluding OPEC, S.A.
N.S.A.

2.553

(-786) 2,452
-190 -2,132
-596
-320

(-552)
-368
-184
3,105
20

(,219)-1,614

-114

-78

4,333 -1,536

3,085
0,741)
(1,267)
(254)
(-910

-323
35
-39
-379
1,001) (-998) (-508) (-715)
1,256) (-1,264) (-457) (-857)
(678) (1,033)
(469)
(336)

2.224
-133
-3,004

liabilities, (inc. +)

3,433 -4.066

Q2,621) 2,818
(175) (,429 -1,848)
2,349)(-1,184)
(224)
(-43 (,60)
0,870
(104)
(144
(713)
(117)
(1,319
(87)
(-666) (1,191)
(195)

Private transactions in securities, net
-1.318 -1.368
U.S. purchases (-) of foreign securities
-1,990)-2,021)
of which: New bond issues
-2,373) (2,142)
Foreign purch. (+) of U.S. corp. securities
(672
(653
Stocks
544
961
(216)
(324)
of which by OPEC
128
-308
Bonds (includes U.S. Govt. agencies)

39.

Oct.* Nov.*
809
715
9,299 9,182
8,490 8,467

1,288
(360)
-256

365
(130)
104

304
(122)
32

-668
-124
-548
341

-191

-450

1,743 -4,577
961 1,716
782 -6,293

1,857
679
1,178

-628
-283
-345

-342

-194

-81

-25
-95
-222

-21
-7
-166

-71
-10

-37_

_________

-8,397
1 628
1 62

-3,261 .1,714
-2,214 -1,290
12,991
-753
.1.944
-329
-39
1 , 94

4,919
3,051 -1,663
6,635
-984
4.767
8
476

*/ Not seasonally adjusted (except for merchandise trade data lines 1-3).
1/ Differs from "net exports" in the GNP account.
The GNP basis excludesU.S. Government
interest payments for foreigners from service imports and special military exports to Israel.
2/ Includes transactions in U.S. Treasury bonds and notes.
3/ Not seasonally adjusted, p = preliminary.

INTERNATIONAL DEVELOPMENTS
Foreign exchange markets.

The value of the dollar on a weighted

average basis has changed very little since December 10; it is now only
1/4 of a per cent below its value at that time.

Some downward pressure

on the dollar developed after the start of the new year, as U.S. interest
rates led foreign interest rates downward,

The weakness of the lira, which has been apparent
for several months, was recently exacerbated by Italy's internal political
difficulties.
On December 30, the Swiss franc swap contract was rewritten to
reflect the two devaluations of the dollar in 1971 and 1973.

The rewriting

raised the dollar amount of the swap drawing from $971 million to $1,167
million, and resulted in a loss of $196 million for the System.
The System purchased a net $11.5 million equivalent of Swiss
francs during the period to be held in balances, pending an agreement
with the Swiss authorities on how swap losses during the floating rate

IV - 2
period will be shared.

The System also purchased $27.4 million equivalent

of Belgian francs during the period, and used $18.1 million of them to
reduce the swap debt in that currency.

And the System purchased a net

$8 million equivalent of marks, bringing total balances in that currency
to about $70 million equivalent.
As U.S. interest rates declined during the period, Euro-dollar
rates also moved downward.

In the 3-12 month maturities, Euro-dollar rates

fell 1-1/4 percentage points, while in the shorter maturities the decline
was 1/4-1/2 points.

A weighted average of foreign short-term interest rates

also declined during the period, but by a smaller amount than dollar interest
rates.
The price of gold dropped about $9.00 during the period to $130.35
per ounce.

Most of this decline occurred during the last week, as the

IMF's Interim Committee reached final agreement on the auction of 18 to
25 million ounces of the Fund's gold over the next four years.

IV - 3

U.S. International Transactions.

Data available for November

indicate (1) a small reduction in the large U.S. trade surplus, (2)
large net inflows of funds reported by banks, and (3) a continuation of
large U.S.

purchases of new foreign bond issues.

for the third-quarter

Data recently released

balance of payments as a whole show an increase in

the net surplus on military and service transactions and sharp declines
in both U.S. direct investment abroad and foreign direct investment in
the United States.
Merchandise trade.

The trade balance for November recorded

a substantial surplus of $8.6 billion (seasonally adjusted annual rate),
down $1.1 billion from the upward-revised October surplus,

but slightly

higher than the third quarter average.
U.S. MERCHANDISE TRADE
(values in billions of dollars, seasonally adjusted annual rates)
1975
III

Oct.
& Nov.

.9
22.0
84.9r

110.9
23.8
87.1

89.3

98.83

101.7 '101.9r

24.6
64.7

30.0
68.7

1974
EXPORTS
Agric.
Nonag.

IMPORTS
Fuel
Monfuel

BALANCE
VOLUMES (1974=100)
Ag. Exports
Nonag. Exports
Fuel Imports
Nonfuel Imports
r = revised

98.3
22.4
75.9

108.8
25.1
83.7

102.8
19.4
83.4

103.6

101.4

27.4
76.2

27.9
73.5

7.3

13.5

105.2
96.5
97.8
86.6

88.7
94.2
87.0
74.9

-5.3

100
100
100
100

10 6

103.3
95.8 r
r
107.5
83.3

31.6
70.1

9.1

113.2
97.7
111.7
85.5

Oct.

Nov.

.6r
2 4 .5r
87.1r

110.2
23.1
87.1

111

101.6

.2r
.6r

31.0
70.6

9 7r

8.6

32
6 9

115.4
98.6
114.8
84.2

111.0
96.9
108.5
86,8

IV - 4

Agricultural exports declined in November after a spurt in
October, partly reflecting this year's earlier-than-usual corn harvest
and shipments.

For October and November combined, agricultural exports

climbed 10 per cent above their third-quarter volume, while falling
slightly in unit value.

The value of agricultural exports is projected

to decline gradually in the first half of 1976, as volumes fall from the
high levels recorded in the fourth quarter and unit values reflect more
fully the fourth-quarter declines in cash prices of major export crops.
The volume of nonagricultural exports was 2 per cent higher
in October and November than in the third quarter, as exports of
consumer goods increased nearly 5 per cent, exports of both machinery
and nonagricultural industrial supplies rose 2 per cent, and exports
of automotive products fell 4 per cent.

None of the major categories of

these exports showed any large change in unit value between the third
quarter and October-November.

New foreign orders for U.S. durable

goods (excluding motor vehicles and aircraft) showed little change in
either value or estimated volume between the third quarter and OctoberNovember.
The volume of fuel imports declined sharply in November and
is expected to fall further in December, reflecting a readjustment of
inventories in the United States following several months of abnormally
high arrivals of products exported from OPEC countries before price
increases became effective on October 1.
is 4 to 6 weeks.)

(The normal shipment period

The unit value of fuel imports increased from $11.30

IV - 5

per barrel in October to $11.55 in November,

and is

expected to reach

the range of $12.30 in December or January, when the full effects of
the October price increases appear.
The volume of nonfuel imports in October-November was 3 per
cent higher than in

the third quarter, with a steady upward trend since

August apparently reflecting the upturn in U.S. income and economic
activity.

With the exception of automotive products,

all major categories

of nonfuel imports increased in volume during this period,

led by a 12

per cent jump in

capital goods and a 9 per cent climb in

(except foods).

Automotive imports from Canada in October-November were

consumer goods

8 per cent below their third quarter volume; new car imports from other
countries have held steady at their third-quarter volume,

but are expected

to increase sharply during the first quarter of 1976, as importers begin
a new model year with very low inventories of 1975 cars.

The unit value

of nonfuel imports fell slightly in October-November, as prices of
imported nonfuel industrial supplies, capital goods (excluding automotive
products),

and foods,

feeds and beverages fell below their third-quarter

levels, while prices of automotive products and consumer goods (except
foods) increased.
Bank-reported private capital transactions for November
showed a net inflow of $2.6 billion (monthly rate),
$4.1 billion net outflow in October,
changes in

following a large

despite the absence of any significant

interest differentials during November.

Claims on foreigners

increased by $0.6 billion, after a $2.5 billion increase in October, with

IV-

two-thirds of the November increase in short-term maturities,
Liabilities to foreigners increased by $3.1 billion in November, as

usual almost entirely short-term.

Much of this increase was reported by

U.S. agencies and branches of foreign banks,presumably vis-a-vis their
home offices, and is typical of the erratic fluctuations in monthly data
on short-term liabilities.

Both the November outflow and the October

inflow would have been smaller, however, in the absence of net official
purchases of dollars in October and sales of dollars in November.
Transactions in securities (other than U.S. Treasury issues)
showed, on balance, a net outflow of nearly $400 million in November,
mainly reflecting U.S. purchases of $850 million of new foreign bond
issues and foreign purchases of $300 million of U.S. stock.

New foreign

bond issues in the United States rose further to over $1 billion
(preliminary data) in December, including $750 million of IBRD issues,
but are expected to fall to a more normal level in January.

Impressions

gathered from brokers suggest that foreigners increased their net
purchases of U.S. stocks in December and early January.
U.S. liabilities to foreign official agencies, apart from
OPEC, declined by over $300 million in November, following an increase
of $1.2 billion in October.

Liabilities to official OPEC institutions

also declined by roughly $300 million in November, following a large
$700 million increase in October.
Data for December indicate a net decline of roughly $400
million in official holdings of dollars at the New York Fed, with

IV -

liabilities to official OPEC agencies increasing by roughly $400 million.
A large decline in liabilities to official agencies in Australia accounted
for most of the difference,
, as uncertainties during the Australian election

period induced a speculative attack on the Australian dollar, which is
currently pegged to a basket of other currencies.
Recently published third-quarter data for the entire balance of

payments show a surplus of $10.1 billion (seasonally adjusted annual
rate) on net military and services transactions, compared with $6.5

billion in the second quarter.

Over half of the increase was in military

items, as military sales jumped sharply, in part due to an unusual
bunching of shipments.

The balance on goods and services continued in

large surplus, registering $18.2 billion in the third quarter after
reaching a peak of $20.1 billion in the second quarter.
U.S. direct investment outflows and foreign direct investment
in the United States both fell sharply in the third quarter, in each
case reflecting a shuffling of funds between parent firms and subsidiaries, rather than any major change in long-run investment patterns.
Net direct investment in the third quarter was an outflow of nearly $800
million, compared with quarterly outflows averaging roughly $1.25 billion
during 1974 and the first half of 1975.

IV-8
Monetary and financial conditions in major foreign countries.
Domestic money-market conditions in major foreign countries during 1975
followed broadly developments in U.S. markets.

In the first half of

the year short-term interest rates abroad continued the sharp decline that
had begun in 1974.

Since mid-year, interest rates in Canada and the

United Kingdom have risen significantly, but elsewhere they have risen
only slightly or have continued to decline.

In the past two weeks,

rates in many countries have declined. Yields on long-term fixed-interest
assets also declined on balance in 1975 -- except in Canada -- though

the decline in these yields was much smaller than the decline in shortterm rates.

Prices of foreign equities, like stock prices in the

United States, rose considerably in early 1975 but then generally held
steady, at least until recently.

The rate of growth of the monetary

aggregates in most countries has been restrained by the weak private-sector
demand for credit.

The stance of monetary policy to date has been

generally accommodative, although monetary authorities in many countries
are concerned that the existing high degree of bank liquidity will make
control of monetary aggregates difficult this year, when economic activity
and the demand for credit are expected to strengthen.
Although short-term interest rates in most countries have
risen somewhat from their 1975 lows, they remain well below their
levels at the beginning of 1975; the decline of almost 10 percentage
points in Italy (from an exceptionally high level) is especially striking.
Only in Canada and the United Kingdom have rates tended to increase
significantly (and, in the British case, erratically) in the second

SHORT-TERM AND LONG-TERM INTEREST RATES
Change
end

1974
Short-term rates:1/
Canada
France
Germany
Italy
Japan
United Kingdom
United States
0%
Long-term rates:
SCanada
France
Germany

Italy
Japan

United Kingdom
United States

10.50
11.88
8.30
17.25
13.50

12.44
8.94

Level (per cent per annum)
end-Nov.
end-Dec.
1975
low (date)
1975
1975

9.38

6.25 (Feb.
6.00 (Oct.
3.50 (Aug.
7.25 (Nov.
7.50 (Nov.
9.19 (Apr.
5.25 (June

6.50
4.10

7.63
7.50
11.50

5.75

8.14 (Feb.

14)

9.89 (Oct.

17)

9.58
9.97

9.43

7.44 (Aug. 26)

7.79

12.65
9.60
17.20
7.93

11.18 (March)
9.02 (Dec.)
13.11 (Mar. 20)

11.46
9.17
14.57
8.35

8.85
10.93

7.63 (Feb. 21)

9.25
6.44

4.20
7.63
7.50

10.81
5.25

9.51
9.91
7.74
9.02
14.48

8.03

Latest (date)

9.25 (Jan.
6.00 (Jan.
3.90 (Jan.
7.63 (Jan.
7.50 (Jan.
10.13 (Jan.
5.00 (Jan.

9.49 (Jan. 2)
9.94 (Jan. 2)
7.50 (Jan. 9)
11.46 (Nov.)
9.02 (Dec.)
13.41 (Jan. 9)
7.93 (Jan. 12)

(percentage points)
end 1974 to
1975 low to
1975 low
latest

-4.25
-5.88
-4.80
-10.00
-6.00
-3.25
-3.69

+3.00
0
+0.40

-0.71
-1.04
-1.99
-1.47
-0.58
-4.09
-0.30

+1.35

+0.38
0

+0.94
-0.25

+0.05
+0.06
+0.28

0
+0.30
+0.30

interbank rates for France, Germany, Italy,

The short-term rates quoted are generally 3-month rates:

and
For
2/
the

the United Kingdom; the finance company paper rate fcr Canada; and the CD rate for the United States.
Japan, the call money rate is quoted.
The long-term rates quoted are all government bond yields -- mostly composite yields. For the United States,
20-year constant maturity yield is quoted.

IV-10

half of the year.

In those two countries the authorities have considered

it essential to maintain interest rates substantially above rates on
dollar-denominated assets to help finance large current account deficits
without too great a depreciation of their currencies.

Interest rates

elsewhere, except in Germany and Switzerland, are also at or above U.S.
and Euro-dollar rates, but the differential is relatively small.
The trend of long-term yields in 1975, though generally
downward, has been less pronounced and less uniform.

In Canada, as in

the United States, yields now are actually above year-earlier levels.
In the United Kingdom yields have fallen considerably but remain high.
In other countries, the net decline in yields over the year was about
50 to 150 basis points.
The downward shift of the yield curve in all countries -despite the persistence of expectations of high inflation rates --

and

its steeper slope reflect the generally high degree of liquidity both
of the banking sector and of the private nonbank sector.

The steeper

slope of the yield curve also reflects (1) a widespread expectation
of rising interest rates as economic activity -- and hence the demand
for credit -- increases this year; and (2) the attempts to finance
very large public sector deficits by the issuance of long-term debt.
Actually, the financing of government deficits has generally proved to
be somewhat easier than had previously been expected, partly because
the expected size of government borrowing requirements has declined
somewhat in some cases (Germany and the United Kingdom), but also

IV-11

because the authorities have been able to sell large amounts of longterm debt and

Treasury bills to nonbanks with relatively little increase

in yields.
The decline in interest rates, which, as indicated, was
especially sharp in the latter part of 1974 and in early 1975, gave a
considerable boost to equity prices early last year.

However, as signs

of economic recovery and improved corporate profits were pushed further
into the future, and as the decline in interest rates levelled out,
equity prices stopped rising (and actually fell in Italy and the Netherlands).
Equity markets -- except in Germany and Australia -- remained sluggish

until recently, when as in the United States, equity prices moved higher,
particularly in the United Kingdom.
The weakness of aggregate demand, especially in the private
sector, has tended to moderate the growth of the money stock during 1975.
In Germany, for example, although the growth rate of "central bank money"
during 1975 was, at an estimated 9-1/2 per cent, above the Bundesbank's
target rate of 8 per cent (principally because currency in circulation
increased rapidly), the level of M2 was actually no higher in November
1975 than it was a year earlier.

In the second half of 1975 there was

some acceleration in the rate of growth of the aggregates in Germany
and in France, reflecting perhaps the beginning of an upturn in activity
and, in the case of France, large cash disbursements by the Government
resulting from the September reflationary package.

Growth of the

aggregates in Canada and Italy has been relatively high throughout
most of the year; the 5-1/2 per cent increase in Canadian M1 recorded

IV-12
GROWTH OF THE MONEY STOCK IN MAJOR INDUSTRIAL COUNTRIES

(percentage change; SAAR)
1974 Q4 from
1973 Q4

Latest 3 months from:
Same Period, Previous
Year Earlier 3 months

Latest
Month

7.2
19.3

15.9
17.5

22.2

11.0

Germany

21.7

17.9

France

18,7
17.6

14.2

Canada

16.4

24.0
13.4

Nov.

-4.4

Nov.

4.3
Japan

-0.3

8.5

Nov.

21.9
Oct.

22.2

11.1
11.2

13.6

11.9

United Kingdom

6.2
12.8

17.8
10.0

15.8
10.9

United States

5.2
7.7

Sources:

Various national sources.

Nov.

Dec.(p)

IV-13
in November alone was distorted by the recent postal strike,1/ but
M1 grew at a 20 per cent annual rate from January through October.
In Japan, the relative rates of growth of M1 and M2 have
been affected by anticipation of the recent decline in interest rates
(particularly the rate on time deposits), which has induced a shift
from sight to time deposits.

Abstracting from that shift, growth rates

for both M1 and M2 have been moderate, by Japanese standards at least.
Growth of the aggregates in the United Kingdom, especially in the later
part of the year, has also been moderate.

Indeed, the Bank of England

now finds itself in the unaccustomed position of being criticized for
insufficient growth of the money stock.

In Switzerland, the central

bank's target of 6 per cent for the growth of M1 (year over year) may

not be reached; in the first 10 months, the rate of increase was only
4.2 per cent.
Monetary authorities in some countries have acted in recent
months to lower interest rates and generally to ease the stance of
monetary policy.

Since monetary policy abroad was last described in

detail in the Greenbook (in August), the Bank of Japan has lowered its
discount rate, eased restrictions on capital inflows, lowered reserve
requirements, and announced some easing of credit controls.

Authorities

in virtually every other country also reduced their discount rates,
the latest reduction being that of the Swiss National Bank on January 12

1/ The timing of many payments was delayed and money was accumulated
temporarily in demand deposit accounts, while those who failed to
receive payments drew on bank loans to finance their operations.

IV-14
(from 3 to 2-1/2 per cent).

Canada is the major exception; the

Bank of Canada's discount rate was actually raised in September, from
8.25 to 9 per cent, to help keep the growth of M1 "within reasonable
limits".

Bank of England's minimum lending rate was also raised

sharply in October, from 11 to 12 per cent, but has since fallen back
in quarter-point jumps to 11 per cent; the initial rise in the minimum
lending rate was sufficiently high to generate expectations of subsequent
declines, enabling the Bank to sell huge quantities of long-term
government debt.
In Germany, the banks' free liquid reserves have risen
sharply, and in July-October the Bundesbank supported the government
bond market to an unprecedented extent.

In mid-December the Bundesbank

announced its target for growth of "central bank money" for 1976:
although the target rate of 8 per cent is unchanged from last year,
the shift in the basis of calculation to the change from the average
of one year to the average of the next, rather than the change from
December to December, results in an effective lowering of the target
rate.

The Swiss National Bank, the only other foreign central bank

that announces an explicit target for the money stock, recently
announced that the target rate of growth of M1 would be 6 per cent in
1976, as it was in 1975 (but, as noted above, the 1975 target may not
be reached.)

- 15 -

Monetary reform negotiations.

The IMF Interim Committee

met in Jamaica January 7-8 and approved a package of measures including:

a more detailed agreement on the utilization of part of

the IMF's gold; amendments to the IMF Articles of Agreement; expansion of IMF quotas; and a temporary relaxation of the limits the
IMF currently imposes on loans from its regular resources.

These

agreements conclude a second phase of the monetary reform negotiations begun in 1972 and continued on a reduced scale after mid-1974.
The Interim Committee decided that the Fund should implement quickly the agreement of August 31, 1975, to sell 25 million
ounces of Fund gold for the benefit of developing countries.

Such

sales are now to be made by public auction over a four-year period.
The Committee accepted the recommendation reached last month by the
G-10 countries that the Bank for International Settlements be permitted to bid in these auctions.

(Upon his return to France,

Finance Minister Fourcade announced that France will buy gold on
the occasion of the Fund's first auction.) Profits from IMF gold
sales are to be channeled to a newly established Trust Fund and
utilized for balance-of-payments assistance on concessional terms
to low-income countries.
The most publicized of the amendments to the IMF Articles
endorsed by the Interim Committee were the revised provisions on
exchange rate arrangements.

The proposed new Article IV,

which is

- 16 a slight modification of the version negotiated by the United States
and France in November, stresses the objective of achieving greater
stability in the exchange-rate system, but relates this goal to the
achievement of greater underlying stability in economic and financial
factors.

The United States would retain a veto, based on its voting

share in the IMF, over any return to a generalized system of par
values.
As a companion measure to the expansion of quotas agreed
last fall, the Interim Committee agreed that all members should make
their currencies usable in Fund lending operations within six months.
This measure has particular significance for the OPEC countries,
many of whom have refused to provide low-interest funds (currently
3.5 per cent per annum) for use in financing the IMF's regular
lending operations.
Pending adoption of the enlarged IMF quotas -- a process
that may take two years -- the Interim Committee agreed to expand
by 45 per cent countries' access to the Fund's regular credit
branches.

This temporary measure will cushion the effects of the

termination of the IMF Oil Facility in the spring of this year.
The Oil Facility has been the principal source of financing for
the record drawings from the IMF of some $8 billion over the past
two years.

The temporary expansion of credit tranches agreed in

Jamaica may increase drawings by non-oil developing countries by
about $1.5 billion during 1976.

Access to IMF credit by other

- 17 -

member countries (including Italy, the United Kingdom, and several
smaller OECD countries that face large payments deficits) will also
be increased.

Increased utilization of IMF credit in 1976, however,

is not expected to strain the roughly $10 billion of usable resources
the IMF has available from past subscriptions.

APPENDIX A*
TECHNICAL NOTE ON THE RECENT REVENUE ADJUSTMENT ACT OF 1975
The implementation of the Revenue Adjustment Act of 1975,
adopted by Congress in the final days of its recent session, is
complicated by the fact that legislation which was originally prepared
to achieve a tax cut for the full year 1976 was changed so that the
tax reductions would apply only to the first six months. These
changes arose out of a compromise between Congress and the Administration.
The shortening of the effective tax cut period introduced a number of
arithmetic complications into the specifics of the Act.
In order to limit the impact on withholding taxes to six
months, the Act contains clauses which in effect reduce the annual tax
cuts to half their proposed original value, but then make the cuts
effective for the entire 1976 calendar year. Withholding schedules,
however, reflect the full cut over a period of six months. Such an
approach was necessary because it is difficult to administer a change
in tax liabilities that applies to a taxable period of less than one
year. As finally enacted, therefore, the Act lowers 1976 tax liabilities
by $8.4 billion. At an annual rate, the effective size of this tax
cut is, of course, $16.8 billion--of which $1.9 billion represents
lower business taxes.
Compared to the tax cut of last spring, the new legislation
actually represents a somewhat larger (annual rate) reduction for
individual tax liabilities (excluding last spring's rebate of 1974
taxes). This larger cut is necessary to keep withholding rates unchanged throughout the year, since the earlier adjustment in withholding
schedules allowed taxpayers to realize a one-year tax cut over a period
of only eight months.
Table 1 compares the estimated effects of the new Revenue
Adjustment Act with those of last spring's Tax Reduction Act. To make
the comparison clear, all changes are shown on an annual rate basis,
although if withholding rates are allowed to rise next June, the effects
would be smaller. The estimates shown were prepared by the staff of
the Joint Committee on Internal Revenue Taxation. For the new legislation, these are expressed in terms of taxes on 1976 incomes, whereas
the impact of last spring's legislation is shown in terms of taxes
on 1975 incomes.
*

Prepared by Frank Russek, Economist, Government Finance Section,
Division of Research and Statistics.

A - 2
Table 1
Comparison of the Revenue Adjustment Act of 1975 and
the Tax Reduction Act of 1975
( $ billions)

Revenue Adjustment Act of 1975

(Dec., '75)

Individuals

$14.9

Tax Reduction Act of 1975

(Mar., '75)

Individuals

$19.8

(a)

Increases the minimum
standard deduction from
$1,300 to $1,700 for single
persons and to $2,100 for
joint returns, and raises
the percentage standard
deduction from 15 per cent
to 16 per cent with a
maximum of $2,400 for
single persons and $2,800
for joint returns

(4.0)

(a)

($2.6)
Raised the minimum
standard deduction from
$1,300 to $1,600 for
single persons and to
$1,900 for joint returns,
and increased the percentage standard deduction
from 15 per cent to 16
per cent with a maximum
of $2,300 for single
persons and $2,600 for
joint returns

(b)

Provides a (non-refundable)
tax credit of $35 per exemption or a credit equal to 2
per cent of the first $9,000
of taxable income (whichever
is larger)

(9.5)

(b)

Provided a (nonrefundable) (5.2)
tax credit of $30 per
exemption

(1.4)

10 per cent with a maximum
credit of $400
(d)

Not continued

(e) Continuation required no
new legislation

(1.4)

Introduced a refundable
(1.5)
earned-income credit of
10 per cent with a maximum
credit of $400
Provided a 5 per cent tax (0.6)
credit on the purchase
price of a new home, with
a maximum credit of $2,000
Liberalized the provisions
for child-care deductions
on a permanent basis

I/ It is estimated that roughly $1.0 billion will be paid to non-taxpayers.
This portion will be treated as an increase in outlays rather than as a
reduction in taxes.
2/ About $1.2 billion is expected to be paid to non-taxpayers; thus, it is
estimated that taxes will be reduced by $.3 billion.

(.1)

A- 3
Revenue Adjustment Act of 1975 (Dec., '75)

Tax Reduction Act of 1975

Individuals

(f)

Nothing comparable

Business
(a)

Extends the 1975 changes
in the corporate tax rate
and surtax exemption

$1.9

(1.9)

Total

Provided a rebate on
(9.8)
1974 individual income tax
liabilities, and a onetime $50 social security
cash payment

Business

$2.8

(a) Raised the investment
(3.3)
tax credit from 7 per
cent (4 per cent in the
case of public utilities)
to 10 per cent for items
placed in service before
1977

Continuation of 10 per cent
investment credit through 1976
required no new legislation:
qualified investment must be
placed in service (not just
ordered)before 1977

(b)

(f)

(Mar.,'75)

(b) Increased the corporate
(1.5)
surtax exemption from
$25,000 to $50,000,and
reduced the corporate
tax rate from 22 per cent
to 20 per cent on the
first $25,000 of profits
(c)

$16.8

Total

(-2.0)
Permanently increased
taxes by repealing gas and oil
depletion allowances, and
by strengthening the rules
for use of the foreign
tax credit

$22.6

1/ The total cost of the $50 cash payments was $1.7 billion, and was classified
as a Federal outlay.
NOTE: In the actual writing of the Revenue Adjustment Act, Congress took
into account that the changes in tax law provisions, while conceptually
designed to reduce withholding taxes for only 6 months, will nonetheless
affect the taxes on income received throughout 1976. Accordingly, the
written Act provides increases in the minimum standard deduction for
the 1976 tax year to only $1,500 and $1,700 for persons filing single
and joint returns, respectively, rather than to $1,700 and $2,100 as
shown above and originally proposed. Also, the individual tax credit
was actually set at $17.50 rather than at $35.00, and the earned-income
credit was set at 5 per cent rather than at 10 per cent. Similar adjustments were made to the percentage standard deduction and to provisions affecting the taxes of small corporations.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 20, 1976 : Greenbook Part 2

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