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Content last modified 6/05/2009.

January 16,

CONFIDENTIAL (FR)
CLASS II - FOMC

SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
Board of Governors
of the Federal Reserve System

1976

TABLE OF CONTENTS
Page
THE DOMESTIC NONFINANCIAL ECONOMY

Industrial production....................................
Merchant builder sales of new
single-family homes....................................
Inventories............................................
TABLES:
Industrial production...................................
Home sales..............................................
THE DOMESTIC FINANCIAL ECONOMY
Mortgage market..........................................
TABLES:

Average rates and yields on newhome mortgages........................................*

Interest rates...........................................
CORRECTION...............................................

APPENDIX
Highlights of the revision of the
income in product accounts.............................

SUPPLEMENTAL NOTES
The Domestic Nonfinancial Economy
Industrial production increased an estimated 1 per cent in
December following a rise of 0.4 per cent in October and an upward
revised 0.5 increase in November.

At 118.5 per cent of the 1967 average,

the total index is about 8 per cent above the April low and 9 per cent
below September 1974.

Gains were strong and widespread among consumer

goods, business equipment, and materials.
Final products.

Output of durable consumer goods increased

further in December reflecting some rise in autos and continued strength
in home goods such as appliances and household furnishings.

Auto

assemblies were at an annual rate of 7.8 million units in December and
production in the first quarter of 1976 is currently scheduled to be
raised to an 8.0 million unit annual rate.

Output of nondurable consumer

goods declined more in this cycle than usual, but has more than recovered
the 5 per cent loss.

Production of business equipment also rose strongly

in December, but the level remains only slightly above the springtime
low.

Output of construction producers is estimated to have advanced

further in December.
Materials.

Production of durable goods materials including

steel increased in December from a November level which was revised
upward substantially.

Nondurable goods materials advanced further and

have now recovered most of the 20 per cent decline which ended in
March 1975.

The textile, paper, and chemical group has advanced an

- 2-

estimated 30 per cent since the spring low.

With the recent recovery

in materials, inventory reduction of these goods has apparently ended
and some accumulation is underway in selected industries.
INDUSTRIAL PRODUCTION

(Seasonally adjusted)

Sept.

Oct.

1975
Nov.
(p)

Dec.
(e)

Total

116.2

116.7

117.3

118.5

1.0

.9

2.9

Products, total

116.9

117.0

117.8

118.9

.9

.2

1.6

Final products
Consumer goods
Durable goods
Nondurable goods

116.9
126.8
118.3
130.2

116.9
127.2
118.0
130.6

117.6
128.3
118.6
132.0

118.6
129.6
120.1
133.2

.9
1.0
1.3
.9

.3
5.0
9.1
3.7

1.3
1.9
1.8
1.9

Business equipment

115.6

115.5

116.2

117.2

.9

-7.8

1.3

Intermediate products
116.6
Construction products 112.0

117.2
112.4

118.4
113.1

120.0
114.5

1.4
1.2

- .4
-3.2

2.7
3.2

116.4

116.7

117.9

1.0

2.7

5.3

Indexes, 1967=100

Materials

115.1

Per cent changes
Month
Year
QIII to
QIV
ago
ago

p--preliminary.
e--estimated.

Merchant builder sales of new single-family homes increased
9 per cent further in November from the upward revised October figure.
At a seasonally adjusted annual rate of 660,000 units, new home sales
were the highest in nearly 3 years and more than 70 per cent above the
recent low last December.

The rise in November may have been due, in

part, to the closeness of the year-end expiration of the 5 per cent
tax credit.

-3-

The stock of unsold new homes declined 2 per cent and by the
end of the month represented about 7 months' supply at the November
sales rate.
Existing home sales continued at a record pace in November.
The seasonally adjusted index of unit sales volume rose to 124 (1972=
100)--2 per cent above a month earlier.
HOME SALES

Median Prices

of Homes Sold
Sales Indexes of Unit Volume
New Home Sales and Stocks
Existing
Months' (1972=100,seasonally adjusted) New
Homes
Homes
homes
homes
Existing
New
sold 1/ for sale 2/ supply
(thousands of units)

homes 3/

homes

(thou. of dollars'

1974
QI
QII

523
550

452
436

10.4
9.5

73
77

106
105

35.2
35.6

30.9
32.2

QIII

490

414

10.1

68

99

36.2

32.8

QIV

417

400

11.5

58

93

37.3

32.2

QI

426

396

11.2

59

95

38.1

33.8

QII

571

378

7.9

80

108

39.0

35.4

QIII(r)

568

383

8.1

79

112

38.8

36.1

Aug.(r)

576

379

7.9

80

111

38.2

36.3

Sept.(r) 574
Oct.(r) 604
Nov.(p) 660

383
386
377

8.0
7.7
6.9

80
84
91

119
122
124

39.6
40.7
40.8

35.8
35.4
35.7

1975

1/ Seasonally adjusted annual rate.
Seasonally adjusted, end of period.
Converted to 1972 index for comparison with existing home sales, which are not
available on any other basis.

-4-

Inventories.

Book value of retail trade inventories fell at

an annual rate of $9.6 billion in November, having risen at a $19.1
billion rate in October and at a $8.8 billion average annual rate in the
third quarter.

Wholesale trade inventories also dropped in November, at

a $2.7 billion annual rate, after rising in October at a $1.1 billion
annual rate and averaging a $3.1 billion annual rate of increase in the
third quarter.
For manufacturing and trade the rate of inventory decline in
November was $9.9 billion following increases at a $21.4 billion annual
rate in October and at a $5.4 billion average annual rate in the third
quarter.

Nevertheless the manufacturing and trade inventory-sales ratio

edged up to 1.53 in November from 1.52 in October.

- 5-

The Domestic Financial Economy
Mortgage market.

According to the HUD (FHA)

opinion survey,

average interest rates on new commitments for conventional new- and
existing-home mortgages declined during December by 5 basis points,
Yields on FHA-insured new-home mortgages for immediate delivery in
the private secondary market fell by 9 basis points to 9.32 per cent.
These rate movements are generally consistent with the primary and
secondary market yields cited in the Greenbook.

AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES
(HUD-FHA Field Office Opinion Survey)
Primary market
Conventional loans
Level 2/
Spread 4/

End
of

Month

(per cent)

1974-Low
High

8.55 (Feb.)
9.80 (Sept.)

-66 (Sept.)
45 (Feb.)

1975-June
July
Aug.
Sept.
Oct.

9.00
9.00
9.15
9.25
9.25

-37
-25
-34
-45
+30

9.06
9.13
9.32
9.74
9.53

-31
-12
-17
+ 4
+31

9.20
9.15

---

9.41
9.32

---

Nov.
Dec.
1/

2/
3/

4/

(basis points)

Secondary market 1/
FHA-insured loans
Level 3/
Spread 4/
Discounts

(per cent)
8.54 (Feb.)
10.38 (Sept.)

(basis points) (points)
- 8 (Sept.)
44 (Feb.)

2.3 (Feb)
6.3 (July,
Sept)
4.3
4.8
6.2
5.5
4.0
3.1
2.4

Any gaps in data are due to periods of adjustment to changes in maximum
permissible contract rates on FHA-insured loans.
Average contract rates (excluding fees or points) on commitments for
mortgage loans, rounded to the nearest 5 basis points.
conventional first
Average gross yield (before deducting servicing costs) to investors
mortgages for immedion 30-year minimum-downpayment FHA-insured first
ate delivery in the private secondary market (excluding FNMA), assuming
prepayment in 15 years.
Average gross mortgage rate or yield minus average yield on new issues
(There were no
of Aaa utility bonds in the last week of the month.
issues of Aaa bonds during the last week of November and December.)
CORRECTION:
Page II-10, line 2:

"highest" should real "second highest".

-6INTEREST RATES
(One day quotes--in per cent)

1975
Highs

Lows

Dec. 15

1976
Jan. 15

Short-Term Rates
Federal funds (wkly. avg.)
3-month
Treasury bills (bid)
Comm. paper (90-119 day)
Bankers' acceptances
Euro-dollars
CD's (NYC) 90-119 day
Most often quoted new
6-month
Treasury bills (bid)
Comm. paper (4-6 mo.)
Federal agencies
CD's (NYC) 180-269 day
Most often quoted new
1-year
Treasury bills (bid)
Federal agencies
CD's (NYC)
Most often quoted new
Prime municipals

7.70( 1/8)
6.90(
9.00(
9.00(
10.25(

5.13(5/21)

5.17(12/17)

4.76(1/14)

4.88(6/16)

5.56
6.00

4.84

1/2)
1/2)
1/1)
1/3)

5.38( 6/2)
5.40(5/30)
5.69(5/21)

9.00( 1/1)

5.80
6.63

5.13
5.05
5.50

5.38(6/11)

6.00(12/10)

5.00(1/14)

7.05(3/25)
8.75( 1/2)
7.67( 1/2)

5.18(6/11)

5.10

5.68(6/12)

5.95
6.13
6.40

5.25
n.a.

8.38( 1/1)

5.75(6/18)

6.50(12/10)

5.38(1/14)

7.35(8/21)
3.00(8/25)

5.37( 2/5)
6.03(2/20)

6.30
6.95

5.44
n.a.

4.00( 1/1)

5.00(3/12)

4.35(8/15)

3.40(

7.00(12/10)
3.70(12/12)

6.25(1/14)
3.20

3.56(9/16)
8.71(9/16)

6.93(2/19)
7.58(2/21)

7.87
8.30

7.41(1/14)
7.99(1/14)

5.38(5/23)

2/7)

Intermediate and Long-Term
Treasury coupon issues
5-years
20-years

Corporate
Seasoned Aaa
Baa
New Issue Aaa Utility

9.02(4/30)
10.63(1/20)

9.80( 4/3)

.35
8.57(2/26)
10.27( 4/3) 10.38

.839(

8.59
10.35

2/6)

9.37(12/11)

8.53p

Municipal
Bond Buyer Index

7.67(10/2)

6.27(2/13)

7.34(12/11)

7.09

Mortgage--average yield in
FNMA auction

9.95(10/6)

3.78(3/10)

9.31

9.13(1/12)

A -

SUPPLEMENTAL APPENDIX A*
HIGHLIGHTS OF THE REVISION OF THE INCOME AND PRODUCT ACCOUNTS
Revised estimates of the national product and income accounts
have now been released by the Department of Commerce. These revised
estimates incorporate new statistical data of three types:
(1) new
benchmark data provided by the 1963 and the 1967 census of business;
(2) new or revised data underlying the GNP and related figures for
the period 1971 through 1974 which normally would be incorporated in
the accounts in the usual July annual revision; and (3) revisions
in some other underlying series extending back further than just three
years.
Besides the statistical revisions, revisions were made
because of definitional and classificational changes in the accounts.
The purpose of these conceptual revisions is to better measure economic
developments and to permit clearer analysis of these developments.
In some cases these conceptual changes make the components of the
accounts more consistent with underlying data. Altogether, twenty
definitional or classificational changes were incorporated in the
revision. Some of these are controversial, and some changed earlier
estimates of components significantly.
While complete information on these revisions is not yet
available, some general comments can be made that may be useful.
First, the broad pattern of economic developments indicated by the
revised estimates is not appreciably different than that depicted by
the former estimates, but the growth in real activity since the mid1960's is a trifle less than indicated earlier and cyclical fluctuations--including the most recent one--have been toned down a bit.
The overall effects of the revision raised nominal GNP for
of 1975 by $24.1 billion, or 1.6 per cent, in annual
third
quarter
the
as a whole the upward revision was $9.7 billion,
terms.
For
1974
rate
with $2.6 billion from statistical changes and $7.1 billion from
definitional and classificational changes. Most of this upward revision occurred in the recent quarters. In 1972 and 1973 the statistical
changes accounted for more than half the total upward revisions.
One of the more significant statistical revisions is a shift
in the base for the implicit price deflator to 1972 average prices
from 1958 prices. Deflation of expenditures is now being made on a
more detailed basis, and this should improve the measurement of changes
in real activity as well as the measurement of over-all price movements. Because of the change of base, the revised GNP implicit price
*Prepared by J. Cortland G. Peret, Assistant Adviser, Division of
Research and Statistics.

A - 2

deflator, of course, is lower than the former one.
Quarter-to-quarter
changes in the two series do vary considerably at times, but for longer
periods they indicate about the same relative increase in average GNP
prices. From the third quarter of 1972 to the third quarter of 1975-the period of particularly sharp price increases--both deflators indicate almost an identical increase of 27.0 per cent. The fixed-weighted
price indexes will not be available for two to three weeks.
The more recent price base has lifted the revised level of
real GNP. As noted, real growth since the mid-1960's is now indicated
to have been slightly less than indicated before, and the amplitude of
recessions has been reduced a bit. Quarter-to-quarter per cent changes
in real GNP are shown for selected periods in the attached table.
The
decline in real GNP from 1973-IV to 1975-I is at an average annual
rate of 5.3 per cent compared with a decline of 6.3 per cent indicated
by earlier estimates of real GNP; from 1974-III to 1975-1 the rates of
decline are 8.4 per cent and 10.2 per cent, respectively.
The rate of
increase since the 1975-I low is now indicated at a 7.5 per cent annual
rate, the same as by the former estimates with the second quarter
rise now shown to be allittle
faster (3.3 per cent compared with 1.9
per cent) and the third quarter a little
slower (11.9 per cent per year,
instead of 13.4 per cent).
Statistical revisions were also made to inventory investment.
The recent accumulation of inventories is now indicated to have been
larger and to have come earlier than shown by the former estimates;
furthermore, the swing from accumulation to liquidation is now indicated to have been sharper.
Several of the definitional and classificational changes
made in the revision affect some of the more important expenditure
and income components you hear about regularly, and brief comments
about some of them might be of particular interest.
Expenditures for mobile homes, $3.3 billion in 1974, have
been transferred from consumer durable expenditures to residential
The rental value of these units will be counted as
structures.
consumer service expenditures, a treatment which parallels that for
Additionally, the allocation of autos and
other types of housing.
light trucks between consumer and business expenditures has been
modified so as to more accurately reflect recent trends in these
items.

A-

3

Net interest paid by the Federal government to foreigners-which amounted to $3.2 billion in 1974--has been shifted from government
purchases (or sales) and imports (or exports) to transfer payments.
This shift does not affect total GNP, but the net exports component of
GNP will no longer be, conceptually, a balance of payments equivalent.
Another important conceptual change is the consistent measurement of depreciation of all capital goods in terms of current replacement prices of the capital goods depreciated. Consistency in depreciation measurement is obtained by basing service lives of all depreciable
capital goods on IRS Bulletin F schedules and then calculating depreciation on these capital goods by the straight line method rather than by
a combination of methods. And this depreciation is based on the
estimated value of the capital goods in terms of current replacement
costs in the period. Measuring depreciation consistently and basing
depreciation estimates on current replacement costs introduces a new
item in the accounts called capital consumption adjustment. This capital
consumption adjustment item includes (1) an amount equal to the difference
between depreciation on a consistency basis and a depreciation figure
consistent (conceptually) with IRS tax depreciation (which is a component
of the capital consumption allowance)--both based on historical costs of
the capital goods, and (2) the difference between depreciation (consistency
basis) on a replacement cost basis and historical cost basis. This
new procedure is intended to provide better measures of gross net product,
gross net income, and equity incomes from ownership of capital. This
capital consumption adjustmet item affects estimates of personal income
through proprietors' income--both farm and nonfarm and rental income.
For 1974 it was rather large--a $10.3 billion reduction. Personal
income in 1974 was not reduced by that amount because a $16.0 billion
upward statistical adjustment for that year due largely to higher compensation more than offset the reduction from the capital consumption
adjustment.
The estimates of some concepts of corporate profits are
affected by the capital consumption adjustment. The new profits series
which takes account of this adjustment is called corporate profits
with inventory valuation and capital consumption adjustments. This
concept of profits is sometimes referred to as economic profits. Book
profits vis-a-vis economic profits are augmented by a negative amount
of either of them. The new figures indicate an even larger decline
than before in the profit share from 1965 through 1974, but also more
recovery since late 1974.

A-4
REAL GNP
Per cent change at annual rates

Revised
Estimates

Former
Estimates

Quarter-to-Quarter Changes
1971:III
IV

2.8
3.5

2.8
6.5

1972:I
II

7.6
7.9
5.3
8.5

6.4
8.4
6.0
8.3

8.8
.2
2.7
1.4

9.5
2.2
1.6
2.4

III
IV

-3.9
-3.7
-2.3
-7.5

-7.0
-1.6
-1.9
-9.0

1975:1
II
III

-9.2
3.3
11.9

III

IV
1973:1
II
III

IV
1974:I
II

-11.4
1.9
13.4

Changes in Selected Periods

1970:IV
1973:1
1973:IV
1975:1

1973:1
1973:IV
1975:1
1975:111

6.2
1.4
-5.3
7.5

2.1
-6.3
7.5