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CONFIDENTIAL (FR)

January 3,

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

1980

TABLE OF CONTENTS
Section

Page

II

DOMESTIC NONFINANCIAL DEVELOPMENTS

Employment and production..........................................

7

Personal income and consumer spending..........................

3

Residential construction.......................
Business fixed investment.....................

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

8
11

Inventory investment..............................................
Government sector.................................................

15
17

Prices.. ............

18

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

Wages.............................................................

21

TABLES:
..............
...............................
Changes in employment
Selected unemployment rates.......................................
Industrial production ..........................................

2
2
4

Selected capacity utilization
rates for U.S. industry.........................................

4

Personal income...................................................

5

Retail sales......................................................
Auto sales........................................................
New private housing activity......................................
Business investment spending......................................

7
7
9
12

Plant and equipment expenditures................................
November anticipated and actual
plant and equipment expenditures...............................

14

Business inventories....................
Inventory to sales ratios........................................

16
16

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

14

Recent changes in producer prices.................................
Recent changes in consumer prices............................ ...

19
19

Hourly earnings index..........................................

22

CHARTS:
New private housing starts..

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

10

.Capital spending commitments......................................

13

Manufacturers' newly approved capital appropriations..............

13

TABLE OF CONTENTS (cont.)

Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

Monetary aggregates and bank credit...............................

3

.....................
Business sector finance......................
Government debt markets.........................................
... .
Mortgage markets............................ ................

8
13
16

Consumer credit........ ........

20

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

TABLES:
Selected financial market quotations............................

2

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

4

Commercial bank credit and business credit........................
Gross offerings of corporate and foreign securities...............

9
11

Government security offerings....................................

14

Monetary aggregates.................

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

Interest rates and supply of mortgage funds
at selected savings and loans..................................

18

Secondary home mortgage market activity...........................

18

Consumer installment credit......................................

21

Finance rates on consumer installment credit......................

21

CHARTS:
Small denomination time deposits
at commercial banks .............................................

6

Percent of respondents offering mortgage
commitments for purchasing new homes...........................

17

APPENDIX A
Treatment of bankers acceptances in the measure
of short- and intermediate term business credit
APPENDIX B
Rate ceilings on consumer installment loans

INTERNATIONAL DEVELOPMENTS

IV

Foreign exchange markets........................................
U.S. international transactions...................................

1
5

Foreign economic developments.....................................
Individual country notes........................................

10
11

TABLE OF CONTENTS (cont.)

Section

Page

TABLES:
U.S. merchandise trade.............................................
5
9
U.S. international transactions....................................
Real GNP and industrial production
in major industrial countries.................................... 13
Consumer and wholesale prices in major industrial countries........ 13
Trade and current-account balances
14
of major industrial countries....................................
CHARTS:
Weighted-average exchange value of the U.S. dollar.................
........
U.S. merchandise trade............... .......... ..........

2
6

II-

T-

1

January
DATA

DOMESTIC
FINANCIAL
SELECTED
PRECEDING GREENBOOK
SINCE
AVAILABLE
(Seasonally
adjusted)

Percent Change

Latest Data

Period

Release
Date

3, 1900

Data

Preceding
Period

Three
Periods
Earlier

Year
Earlier

(At annual rate)
Civilian labor force
employment rate (%) 1/
Insured unemploymen rate (%) 1/
Nonfarm employment payroll(mil.)
Manufacturing

Nonmanufacturing

Nov.
We.
Dov.
No*.
I*.
or.

12-7-79
12-7-79
12-7-79
12-7-79
U-7-79
127-79

103.7
5.8
2.9
90.2
20.9
69.3

2.4
6.0
3.0
2.9
.1
3.8

2.5
6.0
3.1
1.9
-1.3
2.9

:.0
3.8
3.0
.7
.6
3.3

Private nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($) 1/

Doe.
Da*.

U12-79
12-7-79

35.6
6.32

35.6
6.27

35.6
6.22

33.8
5.87

Da.
N.

12-7-79
12-31-79

40.0
19.9

60.2
12.1

40.1
7.9

43.6

S.
Dor.
D*.
Or.
no.

12-14-79
12-U-79
12-16-79
12-14-79
12-1-79

151.6
148.7
171.4
94.6
155.6

-6.3
-9.6
.7
-2.5
-7.7

.0
1.3
-. 2
11.3
-1.0

.7
-1.7
3.9
4.8
.7

Nov.
)o.
lor.

12-21-79
2-21-79
12-21-79

227.5
216.1
240.2

11.7
14.0
6.5

12.3
12.8
8.9

".7
9.6

o .
o .
Ion.

124-79
L2--79
12-6-79

226.2
258.5
256.1

13.6
10.8
23.9

15.2
17.4
15.9

.3.7
.. 5

soe.

12-1U-79

10.9

2.0

Manufcturing:

Average weekly hours (hr.) 1/
Unit labor cost (1967=100)
Industrial production (1967=100)
Consumergoods
equipment
Business
Defemse
space
&
equipment
Materrials
Consumer prices all items (1967=100)
All items,excluding
food& energy
Food
Producer prices: (1967=100)
Finished goods

nonfood
materials,
Intermediate

Crude foodtuffs & feedstuffs
bil.)
($
income
Personal

2/

1999.

12.9
(t

new
Mfrs.

8.0

2.6

2.8

at Stmal rate)

o.

12-21-79

75.5

-1.2

1.9

ov.
De.
lo.

12-21-79
12-21-79
2-21-79

24.6
20.9
3.7

3.5
.5
24.0

3.6
.7
23.2

-Z.0
.7
-.. 5

Oct.
Oct.
Oct.

12-11-79
12-U-79
12-1-79

1.41
1.53
1.29

1.41
1.5
1.28

.43
1.53
1.33

1.40
:.

tories to unfilled orders 1/ Oct.

12-11-79

.366

.560

.557

.30

Retail sales, total ($ bil.)
GAF 3/

Nov.
s.

12-10-79
12-1-79

77.0
16.

1.8
2.4

2.9
2.3

Auto sale, total (mil.
Domestic models
foreign models

Nov.
No.
or.

12-5-79
12-3-79
12--79

9.5
6.9
2.6

.3
-2.6
9.1

-13.9
-21.7
16.8

Plant &Equipment expen. ($ bI.) 4/
All industries
1979
1979-,
"0l t
1904

12+-79
U-6-79
12-6-79
12--79

176.37
18.32
189.32
195.76

2J
2.7
3.4

Capital Appropriations, Mfg.
Housing
starts,private (thous.) 2/
Leading
indicators
(1967+100)

11-27-79
12-18-79
12-31-79

22.520
,1518
136.6

orders dur. goods ($ bil.)

Capital goods industries
Nondefense
Defense
Lavatories to sales ratio: 1/
total
trade,
and
Manufacturing

Manufacturing

Trade
Ratio:

1/
2/

Mfrs.'

-1.9

1.31

durable goods inven-

Actual data used in
At annual rate.

units.) 2/

1979
oM.
oe.

7.1
-11.
-1.3

lieu of percent changes for earlier periods.

3/ Excludes mail order houses.
4/ Planned-CommerceNovember 1979 Survey.

-

-15.3
-22

9.7
:.5
-. 3.2
-2.1
&:4
L4.7
12.
U.1
12.8
39.2
-:1.0
-4.3

DOMESTIC NONFINANCIAL DEVELOPMENTS

Recent indicators of economic activity suggest, on balance, that
the economy performed more strongly than expected in late 1979.

In

November increases in employment and personal income growth were robust,
despite layoffs in the motor vehicle industry.

In addition, gains in

retail sales outstripped continued large price increases.

Areas of weak-

ness were apparent, however, the most notable being the auto industry and
residential construction.

Reduced domestic auto sales led to higher

inventories in October and induced production cuts in November and early
December.

Moreover, recent tight financial conditions appear to have

weakened housing activity in November, and investment spending has continued to moderate.
Employment and Production
Labor demand remained quite strong through mid-November with nonfarm payroll employment up 220,000 over the month.

As in recent months,

the bulk of the hiring was reported in the trade and service industries.
Manufacturing employment was unchanged in November after falling almost
200,000 over the preceding three months.

Factory layoffs have been con-

centrated in durable goods industries--particularly in motor vehicles
and steel--while strike activity has reduced payrolls in machinery.

In

contrast, employment in most soft-goods industries has continued to edge
up.

Since the November labor market surveys were taken, automakers have

announced further cutbacks, raising the number of indefinite layoffs
from about 100,000 in mid-November to nearly 130,000 in the third week
of December.

II-1

II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1978

Nonfarm payroll employment
Strike adjusted

2

1979
Q3

Q2

Q1

Oct.

--Average monthly changes-59
164
334
302
196
318
304
205
62
184

Nov.

218
231

69
57
12
39
169

64
56
8
48
150

-3
3
-6
16
113

-38
-8
-30
3
77

-63
-97
34
22
165

1
-26
27
38
153

Private nonfarm production workers
Manufacturing production workers

256
50

230
44

111
-19

11
-46

141
-67

154
-13

Total employment 3
Nonagricultural

275
268

329
344

-29
-2

253
206

-220
-108

353
216

Manufacturing
Durable
Nondurable
Construction
Trade, finance and services

1. Changes are from final month of preceding period to final month of
period indicated.
2. Survey of establishments. Not strike adjusted, except where noted.
3. Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)

Q1

Q2

1979
Q3

Oct.

Nov.

4.9

5.7

5.7

5.8

6.0

5.8

14.5
7.8
2.5
4.0

15.8
8.7
3.2
4.9

16.2
8.8
3.2
4.9

16.1
9.2
3.4
4.8

16.6
9.5
3.4
4.9

15.9
8.8
3.5
4.7

White
Black and other

4.3
8.9

5.0
11.4

4.9
11.6

5.1
10.8

5.2
11.7

5.2
10.8

Fulltime workers

4.3

5.2

5.2

5.4

5.5

5.4

White collar
Blue collar

2.9
5.3

3.4
6.5

3.3
6.7

3.4
7.2

3.5
7.3

3.1
7.5

1973
Total, 16 years and older
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

II-3

Total employment, as measured by the household survey, rose 350,000
in November, more than offsetting October's 220,000 decline.

The in-

crease in employment, along with a decrease in unemployment, was concentrated among adult women and teenagers.

The decline in unemployment

rates for these groups pushed the overall jobless rate down 0.2 percentage point to 5.8 percent.
Led by a decline in the output of autos, industrial production
decreased 0.5 percent in November to a level close to that of December
The fall off in output also reflected a significant cutback in

1978.

the production of trucks and auto-related materials and parts.

Industry
In

sources have reported further reductions in auto output in December.
addition, output of home goods and construction supplies declined in
November, while business equipment production remained at the reduced

October level, in part reflecting the continued effect of strikes in that
sector.

In line with the drop in production, capacity utilization in

manufacturing fell about 1/2 percentage point to 84.4 percent in November-nearly 3 percentage points below its recent March peak; the large cutback
in the production of motor vehicles and parts accounted for a substantial

part of this decline.
Personal Income and Consumer Spending

Total personal income rose at a $21-1/4 billion annual rate (13
percent annual rate) in November after an $18 billion increase in
October.

The pickup reflected a more rapid growth of private wage and

salary disbursements--almost twice the October increase--as average
weekly hours and employment in some industries increased.

Payrolls

declined in the motor vehicle industry, but the drop was more than offset by relatively large increases in services and trade.

II-4
INDUSTRIAL PRODUCTION
(Percentage change at annual ratel; based on seasonally adjusted data)
77-Q4
to
78-Q2

Total
Final products
Consumer goods
Durable
Nondurable
Business equipment
Materials
Durable
Nondurable
Energy materials

78-Q2
to
78-Q4

78-Q4
to
79-Q2

7.9

1.6

1.1

1.9
-. 4

-. 8
-3.7
-11.5

6.4
3.7
6.0
2.7
10.2
8.4
9.7
9.9
2.9

-6.7
2.3
6.1
11.1
16.1
6.3
5.2

Sept.
to
Oct.

79-Q2
to
79-Q3

.0

-. 3

3.8

Oct.
to
Nov.

-6.0

-1.2
1.2
7.2
-1.2
-14.4

-6.0
-9.6
-26.4
-2.4
1.2

1.2
-3.6
9.6

-7.2
-15.6
.0
-1.2

1.3
.5
3.7
-1.2

3.6

1. Rates of change for periods longer than one month are compound rates.

SELECTED CAPACITY UTILIZATION RATES FOR U.S. INDUSTRY
(Percent, seasonally adjusted)
19731974
High

1979
March1

Oct.

Nov.

88.0

87.1

85.0

84.4

-2.7

Primary Processing
Advanced Processing

93.6
85.4

88.6
86.2

87.2
83.8

86.6
83.1

-2.0
-3.1

Electrical Machinery
Instruments

88.2
86.7

90.5
89.5

90.6
86.3

90.6
86.4

.1
-3.1

93.1

88.3

86.7

85.9

-2.4

92.5
105.2

87.5
89.4

84.7
83.6

83.5
82.9

-4.0
-6.5

94.6

90.0

90.4

90.1

.1

Manufacturing

Materials
Durable Goods Materials
Basic Iron and Steel
Nondurable Goods Materials
1. Recent peak.
2. Percentage points.

1979

Nov. 1979
less
Mar. 19792

II-5

PERSONAL INCOME
(Based on seasonally adjusted annual rate data)
1979

1977
-

- -

1978

Q1

Q2

Q3

Oct.

Changes in billions of dollars1 -

$15.1 $11.0
$18.3
11.4
19.8
15.3
-. 4 -1.5
-. 2

Nov.
-

-

S18.1 $21.3
18.7
20.7
-. 7
.6

$13.9
12.6
1.2

S17.8
17.1
.7

Wage and salary disbursements
Private
Manufacturing

8.4

11.5

11.8

6.1

9.1

9.5

12.2

7.0
2.5

10.1
3.2

10.8
3.5

4.9
.5

8.3
1.3

5.6
2.4

11.1
1.5

Other income
Transfer payments

6.0
1.2

7.1
1.5

5.6
1.8

5.2
1.8

9.7
6.0

9.2
1.9

9.6
1.2

Total personal income
Nonagricultural income
Agricultural income

- - Percentage change, at annual rates 2 - Total personal income
Wage and salary
disbursements

Memorandum:
Real disposable personal
income
Per capita

11.5

12.9

11.4

8.9

11.9

11.2

12.8

12.7

8.0

8.8

5.4

4.2

2.1

-1.4

.2

4.5

3.4

1.2

-2.3

-.8

11.1
9.1

-.8
-1.6

12.9
11.6

n.a.
n.a.

1. Changes over periods longer than one month are averages of montly
changes.
2. Changes over periods of one quarter or more are from final quarter of
preceding period to final quarter of period indicated. Changes for
quarterly periods are compound rates of changes.

II-6

Although an estimate of the change in the personal consumption
deflator is not yet available for November, it appears that real disposable personal income rose somewhat that month, but remained about 1
percent below its peak in December 1978.

In per capita terms, real

disposable income probably dropped 2 percent over the same period.
Consumer purchases rebounded in November (latest available data),
following a decline in the previous month.

The November gain in retail

sales was widespread and nominal sales excluding autos and nonconsumption items increased 1.6 percent.

Sales of apparel and general mer-

chandise were particularly brisk, while a significant portion of the
increased spending at food stores and gasoline service stations apparently was accounted for by higher prices.

Nonetheless, in real terms,

retail sales less auto and nonconsumption items are estimated to have
risen somewhat in November.
Total unit auto sales were at a 9.5 million annual rate in November,
about the same pace as in October.

However, sales of domestic units fell

further to a 6.9 million unit rate, following the end of rebates and
price discounts that had stimulated demand in August and September.

The

introduction of new discount schemes appeared to boost sales of domestictype models somewhat in the first 10 days of December, when sales rose
to a 7.7 million unit annual rate.

Sales of foreign cars rose to a 2.6

million unit annual rate in November, the highest rate since May, as
recent stock shortages eased somewhat.
The University of Michigan Survey Research Center survey of consumer attitudes in November indicated that consumers continued to be
pessimistic about the economy and their personal financial conditions.

II-7

RETAIL SALES
(Percentage change from previous period;
based on seasonally adjusted data)
1979
Sept.

1979
Oct.

Nov.

4.2

2.9

-1.7

1.8

-2.1

2.2

1.9

-2.3

.9

2.4

4.1

2.4

2.4

5.3

-2.7

5.1

-7.1

3.9

2.3

8.1

-.7

-2.2

2.3
.8
2.5

3.7
5.8
1.9

2.3
-2.8
3.9

.5
-.5
-.3

1.8
3.6
1.1

3.1
7.2

4.0
7.4

1.9
2.4

.4
2.8

2.9
4.5

Q3

Q2
.5

Total sales
(Real)1
Total, less auto and

nonconsumption items

GAF 2
Durable
Auto

Furniture & appliances
Nondurable
Apparel
Food
General merchandise 3
Gasoline

.2

1.6

-.4

2.4

4.0

-5.8

1.9

5.5

-9.4

3.6

.3

.1

1. BCD series 59.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales
are also excluded in the GAF composite sales summary.

AUTO SALES
(Millions of units; seasonally adjusted annual rates)
1979
Oct.

Nov.

10.7

9.4

9.5

2.3

2.2

2.4

2.6

8.0

8.5

8.5

7.1

6.9

3.8

3.9

3.6

3.6

3.2

3.1

5.4

4.1

4.9

4.9

4.0

3.8

Q1

Q2

Q3

Sept.

11.6

10.7

10.8

Imports

2.4

2.7

Domestic

9.1

Small
Intermediate &
standard

Total

Note:

Components may not add to totals due to rounding.

II-8

The Michigan index of sentiment--a composite of 5 questions--rose slightly
from October but still was significantly below a year earlier and in the
depressed range reported during the 1974-75 recession.

Results of this

survey suggest that motives to buy-in-advance-of-inflation, which have
been important since early 1977, may be diminishing even though inflation expectations have been revised up.
of interest rates and housing prices has
about housing market conditions.

Concern about the high level
heightened consumer pessimism

In November the Conference Board

confidence index--also a composite of 5 questions but with wording of a
more near-term orientation than the Michigan index--edged up after the
October rebound.

However, it remains relatively low by historical

standards.
Residential Construction
Tighter financial conditions since October 6 appear to have damped
housing activity.

Total housing starts fell 14 percent in November to a

1.5 million unit annual rate, following an 8 percent decline in October.
Moreover, permits issued for residential building dropped to a 1.3 million unit annual rate, the lowest monthly total since the summer of 1976.
Declines in both measures were experienced throughout much of the nation,
with the largest losses in the north central and west regions.
Residential construction activity has receded most noticeably in
the single family sector, where starts fell 23 percent from September to
November.

Aside from the weather-depressed rate last February, the

November level of 966,000 starts in this sector was the lowest monthly
total since September

1975.

Other incoming data also indicate some

weakening of demand pressures in the single-family market.

For example,

II-9

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

`1979

1978

1

Annual

QIV

Total
Permits
Starts

1.80
2.02

Single-family
Permits
Starts
Sales
New homes
Existing homes
Multifamily
Permits
Starts

/

1

/

2/
Nov.

QII

QIII
Sept.
1 1 _ _ ._ i -

Oct.
- --

1.82
2.08

1.59
1.83

1.65
1.83

1.77
1.92

1.54
1.76

1.27
1.52

1.18
1.43

1.22
1.49

1.03
1.26

1.02
1.24

1.01
1.25

.93
1.16

.75
.97

.82
3.90

.83
4.27

.71
3.73

.76
3.88

.74
4.01

.72
3.99

n.a.
3.55

.60
.59

.56
.57

.64
.60

.76
.67

.61
.60

.52
.55

- -

Mobile home shipments
1/ Regular monthly revision.
2/ Preliminary estimates except permits which reflect first monthly
revision.

n.a.

II-10

NEW PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)

Millions of units
2.4

TOTAL

2.0

1.6

1.2

SINGLE-FAMILY

.8

MULTIFAMILY

.4

0

\

1976

1977

1978

1979

II-l1

industry sources report that total home sales declined in November, and
home prices have declined recently--particularly prices of existing
homes.
The multifamily market has shown less weakness than the singlefamily sector.

Even though multifamily housing starts fell 8 percent

in November, they still were more than 4 percent higher than the average
pace of the first half of the year.

The relative strength in this sec-

tor undoubtedly reflects the continued tightness of rental markets in
many areas of the country.
Business Fixed Investment
Indicators of business capital spending were mixed in October and
November, but, on balance, they suggest a decline in real nonresidential
fixed investment in the fourth quarter.

Shipments of nondefense capi'al

goods fell 2 percent in November--in part because of strikes in the
construction machinery industry--after little change in the previous
two months.

Sales of heavy-weight trucks in October and November were

below the third quarter pace, and business purchases of automobiles
were probably down in line with the overall slump in auto sales.

On the

other hand, the value of nonresidential construction put-in-place rose
4-1/2 percent in October, partly due to the unusually mild weather experienced in much of the country, before easing off in November.
Capital spending commitments suggest a further slowing of outlay
growth in the near term.

New orders for nondefense capital goods in

nominal terms rose 1.5 percent in November and were close to the level
around which they have fluctuated since last spring.

Contracts for non-

residential construction also have shown little overall growth since

II-12

BUSINESS INVESTMENT SPENDING
(Percentage change from preceding comparable period,
based on seasonally adjusted data)
November 1978
to
Nov. November 1979

Ql

Q2

1979
Sept. Oct.
Q3

5.2

-.6

5.4

.1

.0

-2.0

Nonresidential construction
put-in-place
0.0

8.0

4.8 -0.6

4.5

-0.7

0.6 10.9

n.a. n.a.

n.a

n.a.

n.a.

4.3

n.a. n.a.

n.a.

n.a

n.a.

Nondefense capital goods
shipments

Building
Nonbuilding

-0.7

9.1

17.1

II-13

CAPITAL SPENDING COMMITMENTS
(Seasonally adjusted)
Billions of dollars

ORDERS NONDEFENSE CAPITAL GOODS

Total
(21.0)

(15.4)

i

i I

I I I I I I
1977

I

I I I I I 1i
1
1978

1 I I I I

MANUFACTURERS' NEWLY APPROVED CAPITAL APPROPRIATIONS
Net of cancellations

I II , I
1979

I

I I

Quarterly rate,
billions of dollar

(22.1--

Total

(16.6)

petroleum

1977

1979

II-14

PLANT AND EQUIPMENT EXPENDITURES
(Percentage change from period indicated)

Anticipated for 1979 from 1978:1
Survey taken
Aug.
Nov.
May
Feb.
Dec.
1979
1979
1978
1979
1979

Anticipated
for 1980-Q2
from 1979-Q4 2
Survey taken
Nov.
1979

11.2

11.3

12.7

13.2

14.7

12.8

13.8

14.7

14.8

14.7

15.8

15.2

Durables

16.2

19.5

16.9

18.5

19.7

22.5

Nondurables

11.7

10.4

12.9

11.2

12.4

8.6

9.1

8.6

11.1

12.1

13.8

10.9

All Business
Manufacturing

Nonmanufacturing

1. Results are adjusted for systematic bias. Without this adjustment,
the 1979 increase would have been 11.6 percent in December, 13.5 percent in February, 14.1 percent in May, 15.2 percent in August, and
15.1 percent in November.
2. Annual rate of change.

NOVEMBER ANTICIPATED AND ACTUAL PLANT AND EQUIPMENT EXPENDITURES
(Percentage change at annual rates)
Percentage change over
two quarters ending in:

Survey

Actual

Error

1970:Q2
1971:Q2
1972:Q2
1973:Q2
1974:Q2

10.2
1.2
10.9
12.4
13.7

6.2
7.7
9.7
13.1
15.3

4.0
-6.5
1.2
-. 7
-1.6

1975:Q2
1976:Q2
1977:Q2
1978:Q2
1979:Q2

9.1
10.9
5.4
10.8
8.3

-6.4
12.9
14.9
19.2
11.9

15.5
-2.0
-9.5
-8.4
-3.6

1980:Q2

12.8

II-15

early in 1979.

In addition, a 13.5 percent increase in net capital appro-

priations by large manufacturers in the third quarter did little more
than offset an 11 percent decline in the second quarter.

Excluding the

volatile petroleum industry, these appropriations were 6 percent below
the record level reached in the first quarter.
In contrast to the commitments data, the most recent Commerce
Department survey of plant and equipment expenditures--taken in late
October and November--suggests a further rise in capital spending through
the first half of 1980.

According to the survey, businesses in November

anticipated that expenditures would rise at a 14.7 percent annual rate
in the fourth quarter of 1979 and at an annual rate of 12.8 percent during
the first half of 1980; manufacturers of durable goods were planning the
most substantial increases. However, these survey results should be interpreted with some caution since the track record over the years has been
somewhat uneven.

Moreover, the spending growth planned over the first

half of the year, as indicated by this survey, appears to be higher than
the increases implied by two private surveys, which reported anticipated
expenditures for all of 1980.
Inventory Investment
The pace of inventory investment rebounded in October (the latest
month for which total business inventory data are available) from an
exceptionally low September rate.

In large part this reflected a turn-

around in the stocks of motor vehicles and parts.

The book value of

total manufacturing and trade inventories increased at a $50 billion
annual rate, about the same as the average rate of accumulation during
the first nine months of the year.

Stocks of motor vehicles and parts,

II-16

BUSINESS INVENTORIES
(Billions of dollars; annual rate of change
in seasonally adjusted book values)

Q1

Q2

1979
Q3

Sept.

Oct.

41.5

49.1

56.3

45.5

4.5

49.9

Manufacturing
Durable
Nondurable

18.1
13.7
4.4

30.2
24.2
6.0

35.0
25.7
9.3

28.3
16.9
11.4

27.4
11.5
15.8

24.4
25.4
-1.0

Trade, total
Wholesale
Retail

23.5
12.8
10.7

18.9
13.2
5.6

21.3
4.7
16.6

17.2
12.6
4.6

-22.8
4.0
-18.8

25.5
8.2
17.3

1978
Manufacturing and trade

INVENTORY TO SALES RATIOS

1979

1978

Q1

Q2

Q3

Sept.

Oct.

1.42

1.41

1.44

1.42

1.41

1.41

Manufacturing
Durable
Nondurable

1.52
1.85
1.15

1.49
1.82
1.11

1.55
1.94
1.11

1.55
1.97
1.10

1.55
1.97
1.09

1.53
1.96
1.08

Trade, total
Wholesale
Retail

1.33
1.29
1.45

1.33
1.23
1.43

1.33
1.18
1.48

1.30
1.17
1.44

1.28
1.16
1.40

1.29
1.15
1.44

Manufacturing and trade

II-17

which fell at more than a $30 billion annual rate in September, rose at
a $7 billion rate in October.

Overall, however, the inventory to sales

ratio for manufacturing and trade remained unchanged in October.
Retail trade stocks rose at an annual rate of $17 billion in
October, following a $19 billion rate decline in September.

This turn-

around, as already indicated, can be attributed in large part to the
buildup at dealers of motor vehicles, following two months of rapid
liquidation.

However, dealers' unit stocks of domestic autos again

edged down somewhat in November.

Manufacturers added to inventories at

a $25 billion annual rate in October, down somewhat from the average of
the first three quarters, but still fairly high in comparison with annual
averages for recent years.

The October increase was entirely in durable

goods, with most of the accumulation at producers of aircraft and
machinery.

By stage of fabrication, the book value of manufacturers'

materials and supplies increased at a $14 billion annual rate in October,
after remaining unchanged in September.

The rise in these stocks over

the six months ending in October had been at a moderate $9 billion annual
rate.
Government Sector
Available Treasury data now indicate that the federal government's
unified budget deficit in the fourth quarter of 1979 was $25 billion
(not seasonally adjusted), up slightly from a year earlier.

To date,

outlay growth has exceeded earlier Administration expectations, with
gains particularly noticeable in defense, interest payments on the public
debt, and CCC loans to farmers.

Congressional action on the military

appropriations bill and Administration commitments for higher real defense

II-18

expenditures both suggest that the recent sizable rise in arms spending
is likely to continue in the year ahead.

On the receipts side of the

budget, federal tax collections also increased more than anticipated,
mainly because of larger than expected gains in nominal income that

further boosted receipts of withheld taxes.
Both the Senate and House have now passed bills imposing a "windfall" tax on the additional producers' revenues that result from the
phased decontrol of oil prices.

Over the 1980-1990 period, the tax pro-

ceeds of the conference committee version of the bill are tentatively
estimated at $227 billion.

The Senate bill earmarks a portion of these

revenues to fund mass transit projects, low income heating assistance,
and energy conservation and development programs.
Spending by state and local governments appears to have slowed
recently, with construction outlays falling and employment remaining
essentially unchanged.

New construction put-in-place, typically a

volatile series, decreased 5 percent in November, following a robust
8-1/2 percent increase in October.

In real terms, expenditures continued

to run around 8 percent below the peak level of October 1978.

State and

local government payrolls reportedly changed little in November, following
a small decrease in the previous month.

The sector's weak employment

picture reflects, in part, reductions in federal appropriations for subsidized public service jobs for the 1980 fiscal year.
Prices
Aggregate price measures continued to rise during October and
November at about the same rapid pace as in earlier months of 1979.
Consumer prices advanced by 1 percent in both months, continuing the

II-19

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1
Relative
Importance 2
Dec. 1978

Dec. 77
to
Dec. 78

100.0
25.4
45.2
7.2
38.1
29.4

9.2
11.9
8.4
8.0
8.5
8.0

12.7
8.4
17.9
65.8
9.0
8.6

Intermediate materials 3
Exc. food and energy

94.6
83.5

8.3
8.9

Crude food materials
Crude nonfood
Exc. energy 4/

58.6
41.4
11.2

18.3
15.6
21.3

Finished goods
Consumer foods
Consumer nonfood
Energy
Exc. energy
Capital equipment

Dec. 78
to
Nov. 79

1979
Oct.

Nov.

17.1
22.0
22.6
81.2
8.5
3.3

12.5
-1.1
19.4
56.1
9.1
14.3

15.6
31.6
12.0
29.6
7.1
6.5

16.3
12.8

18.4
12.2

22.4
20.1

10.8
7.9

12.3
25.7
20.8

17.5
35.1
3.2

5.8
33.7
52.5

23.9
24.1
47.3

Sept.

1. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
2. Relative importance weights are on a stage of processing basis.
3. Excludes intermediate materials for manufacturing food and animal
feed.
4. Also excludes agricultural nonfood materials.
RECENT CHANGES IN CONSUMER PRICES 1
(Percentage change at annual rates; based on seasonally adjusted data) 2
Relative
importance
Dec. 1978
All items
Food
Energy 3
All items less food
and energy 3
Commodities
Services
Memoranda:
Gasoline
Homeownership

Dec. 77
to
Dec. 78

Dec. 78
to
Oct. 79

100.0
18.2
8.5

9.0
11.8
8.0

73.3
35.9
37.4

4.2
23.6

Sept.

1979
Oct.

Nov.

13.1
9.4
38.5

13.0
10.7
32.4

11.8
9.1
12.6

11.7
6.5
1.2

8.5
7.6
9.3

11.2
8.7
13.3

12.0
7.7
13.1

11.9
7.7
15.0

14.0
11.4
13.3

8.5
12.4

53.7
19.6

41.8
16.6

21.0
23.0

20.6
25.6

1. Based on index for all urban consumers.
2. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
3. Energy items (not seasonally adjusted):
gasoline and motor oil, fuel
oil and coal, gas and electricity.

II-20
steady 13 percent annual rate of increase observed so far in 1979.
Producer prices for finished goods rose at an annual rate of nearly 16
percent in November, slightly more than the average increase over the
three previous months.

Prices of materials continued to rise rapidly

at the crude level, for both foodstuffs and nonfood materials, but
slowed at the intermediate level.
Increases in homeownership costs accounted for a substantial part
of the CPI advances in October and November.

This component, with a

relative importance weight of nearly one-fourth of the overall index,
rose at about a 27 percent annual rate over the two months, as the CPI
measures of both home prices and mortgage interest rates continued to
increase sharply.

The rise in mortgage interest rates is due, in part,

to the increases in the FHA/VA ceiling rates in September and October.
Recent increases in commitment rates for conventional mortgage financing,
which lead the closing rates used in the CPI by about 1 quarter, suggest
no near-term slowing of increases in the mortgage rate component.

In

other shelter costs, rents accelerated sharply in October, probably reflecting a passthrough of fuel costs, but rose less rapidly in November.
Retail food price increases were somewhat smaller in November,
after substantial advances in September and October.

This moderation

was partly due to a slower rise in meat prices, with beef prices registering a small decline following 2 months of large increases.

Advances

in prices of crude foodstuffs, a leading indicator of near-term retail
food prices, have averaged about 1-1/4 percent per month over the last
three months, with a 2 percent rise in November.

II-21

Energy price increases have slowed markedly in recent months,
although they remain quite large.

Renewed acceleration seems likely in

the near term, however, as a number of oil companies recently have
announced sizable gasoline price hikes.

These price increases are in

response to a further round of imported crude oil price hikes, some of
which were made retroactive to November 1.
Price pressures have been less evident outside the food, energy
and homeownership areas; nevertheless, prices of other consumer goods
and services have generally advanced in 1979 at a pace slightly above
that in 1978.

These larger price increases reflect, for the most part,

past changes in labor costs, which accelerated sharply in 1978, while
energy and materials costs play a much smaller role.

Price increases

for capital equipment slowed in November, with smaller increases for
many machinery groupings as well as a slight decline for trucks; but
so far in
1978.

1979 they have increased at a pace slightly higher than during

Price increases of intermediate materials also slowed considerably

in Novemeer, but remained about 12 percent above their level a year ago.
Wages
The average hourly earnings index rose at a 9-1/2 percent annual
rate in November.

The index has risen at an annual rate of 8 percent

since the preceding December, compared to an 8-1/2 percent increase
during 1978.

The nondurable manufacturing sector and the transportation

industry, in which a new Teamsters' contract was negotiated last spring,
have been the major sectors where an acceleration in wages has occurred
since 1978.

The moderation in wages in other sectors has been most

marked in trade and in contract construction.

II-22

HOURLY EARNINGS INDEX1
(Percent change at compound annual rates;
based on seasonally adjusted data) 2
Dec. 77
to
Dec. 78
Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Total trade
Services

Dec. 78
to
Nov. 79

Q1

Q2

1979
Q3

Oct.

Nov.

8.5

7.9

8.5

7.1

8.5

3.7

9.5

8.6
8.8
8.2
7.7

8.6
8.4
9.1
6.5

8.5
8.6
8.4
7.7

9.7
10.0
9.1
7.6

8.1
7.9
8.5
6.6

7.0
4.8
11.1
-2.5

9.1
9.5
8.4
9.0

8.8
7.6
7.2

8.6
10.3
7.5

3.5
5.8
5.4

15.9
7.2
7.3

4.9
1.8
3.9

7.5
12.0
8.3

7.5
9.6
7.7

1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime pay in manufacturing.
2. Changes for other than monthly and yearly periods are compounded.

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest data
Month

Indicator

ago

Level

Period

Percnt at

$ billions
Monetary
aggregates1
credit
and
November
reserves
Total
November
Nonborrowed reserves
Money supply
November
M-1
November
M-2
November
M-3
Time and savings deposits (less CDs)November
2
November
CDs
Thrift deposits (S&Ls + MSBs
November
+ Credit Unions)
November
Bank credit

Period
Market yields and stock prices
wk. endg.
Federal funds
"
(90 day)
Treasury bill
Commercial paper (90-119 day)
issue Aaa
New utility
Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FMA/VA)
Dividend price ratio (common
wk endg.
stocks)
end of day
NYSE index (12/31/65-50)

rates

12.4
4.5

2.6
-0.3

378.9
943.4
1611.1
564.5
95.0

1.0
6.1
5.5
9.6
3.9

4.9
9.1
7.9
11.9
9.1

5.1
8.0
7.9
10.0
-0.4

667.7
1133.0

4.3
0.5

6.2
9.6

data
Percent
or index

7.8
12.0

Net change from:
Three
Month
months Year
ago
ago
ago

12/26/79
12/26/79
12/26/79
12/28/79
12/27/79
12/26/79

13.49
12.01
13.35
7.23
12.55

1.03
.79
.44
-. 03
-. 02

1.58
1.89
1.60
.67
1.30

3.24
2.71
2.83
.62
1.95

12/26/79
12/24/79

5.56
61.74

.01
2.08

.32
-. 63

.17
7.38

Period
Credit demands
Business
loans at commercial banks1
Consumer installment credit outstanding1
Mortgage debt outstanding (major holders)1 3
Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings)
Federally sponsored agency (net borrowing)
United States Treasury (net cash borrowing)
Scanonally adjusted.
S billions, not at annual rates
Includes co='l banks, 5&Ls, NSBs,
EstLnated

ago

4.5
8.1

Net

1.
2.
3.
e.

annual

Year

42.7
40.7

Latest
Indicator

Net change
from:
Three
months ago

changesor gross offerings
Year to date
Year
1979
1979
ago

Latest
data

-0.7
November
October
2.2
September 8.2
November
1.5e
December
3.3e
November
2.5c
November
5.5

life Insurance companies,

41.8
31.7
75.8
24.N-.
4 .O0e
22.2e
26.1

FNMA. and CNA.

33.2
35.0
83.4

18.1
4.9.'
20.'

50.0

DOMESTIC FINANCIAL DEVELOPMENTS

Interest rates in securities markets declined further following
the November FOMC meeting, extending the downtrend from peak levels
that began in late October-early November.

A portion of this decline

has been erased since late November, however, in response to indications
that economic activity was less weak than expected in the fourth quarter
and to increasing concerns about the inflationary implications of OPEC
actions.
Over the intermeeting period as a whole, short-term rates have
registered net declines of about 20 to 60 basis points and major banks
have lowered their prime rates 50 basis points to 15-1/4 percent.
Treasury bond yields have also dropped about 20 to 60 basis points while
yields on high grade corporate issues, municipal bonds, and home mortgages have changed only minimally.

Short-term rates are now about 1/2

to 1-1/2 percentage points, and bond yields about 1/2 to 1 percentage
point, above levels prevailing at the time of the October 6 meeting.
Because of the uncertainties that continue to influence attitudes
in financial markets, demands for highly liquid investments have remained
strong since the November FOMC meeting and yield spreads between securities of differing quality have generally widened a bit.

In spite of the

short-range uncertainty among market participants, there still appears
to be a consensus that interest rates will be declining significantly in
1980.

This outlook is reflected, for example, in the Treasury bill

futures market where rates on 90-day bills for June 1980 delivery are
almost 2 percentage points below spot market quotations.

III-1

III-2

SELECED

FINANCIAL MARKET QUOTATIONS
(percent)
1979

High1

1 978
Jan.
Jan.;

Jn
Jan.3

Short-term rates
Federal funds

13.55

6.69

10.59

Treasury bills
1-mcnth
3-month
6-month
1-year

9.88
9.63
9.75
9.54

5.81
6.16
.
6.55

Commercial paper
1-month
3-month
3-month
6-month

12.25
12.25
12.00

Large negotiable CDs4
1-month
3-month
6-month

1974

ha

C

1979
1

nge from:
ov.
rcmc

?OC
, ,

Jan.2
Jan.2

O
?OUPC

11.91

13.10

14.04

2.13

.96

8.93
9.30
9.49
9.68

10.40
10.70
10.53
10.28

11.75
11.92
12.02
11.12

10.36

.-6
1.17
1.34

-.39
.25
-.05

.72

-.42

6.62
6.68
6.70

10.32
10.57
10.62

11.73
11.36
11. 3

13.29
13.56

13.28
13.15

13.21

12.67

1.55
1.29
.33

-.31
-.. 1
-.54

12.58
12.64
12.30

6.62
6.76
7.01

10.37
10.93
11.51

12.39
12.50
12.80

13.66

1.20
.33

-.37
-. 62

14.02

13.29
13.33
13.31

.51

-.71

Eurodollar deposit
1-month
3-month

13.78
14.01

6.89
7.25

11.14
11.81

12.45
12.79

14.33
15.16

14.27
14.65

1.82
1.86

-.36
-. 51

Bank prime rate

12.00

7.75

11.75

13.50

15.75

15.25

1.75

-. 50

U.S. Treasury
(constant maturity)
3-year
10-year
20-year

8.84
8.14
n.a.

7.38
7.81
8.06

9.61
9.16
8.97

10.31
9.60
9.36

11.40
10.78
10.39

10.77
10.50
10.23

.76
.?0
.57

-.63
-. 3
-.. 6

Municipal
(Bond Buyer)5

7.15

5.54

6.58

6.64

7.31

7.23

.59

-. 38

Recently offered7

.3.61
.2.52

3.4

-9.51

10.22
10.25

11.50
11.-I

11.401o

1.13

-.51

?rimar7 conventional
ortgages'

10.03

9.00

12.90

OC
ct.3

13.95

12.17

11.97
11.00

Intermediate- and longterm rates

Corporate Aaa
New issue6

1974,
3
Lo«
5:ick

11.35

12.80

1979
J5an.;

?OMC
c;t.5

7OMC
Tov.20

307.13
51.3
125.20
103.13

821.-2
5.7
154.?8
119.52

397.61
53.39
:35.15
15.2:9

309.22
59.09
220.43
139.0

1.55
ct.
TOM

.1
Ncv.
7a.7
?c

0rices

5cw-Jones Inau3crial
NYSE Comoosite
A-2": Composize
NASDAQ
o-C
.

10.38

1978
Jan.5

577.60

22.39

58.25
4.7

Scacemen: week averages excest

,nhere noted.

S ae-day ;uotes except as noted.
3. Averages for statement week closest to ia:e shown.
-.
Secondary mar<et.
. One-day quotas for receding "Tursday.
Averages for preceding ,eek.
k.
. One-day 3ucoes for 3receding Triday.
3. Calendar ;eek averages.

32-..7
60.69
:.1-8.1

-'.3-2.7
.25
-. 1

:,

1.C
: .-

III-3

Aggregate credit flows to the private sector generally appear
to have weakened during the fourth quarter.

In addition to the sharp

rise in the cost of credit, this development reflects the effects of a
significant tightening of lending standards and terms, as well as some
dropoff in credit demands with the apparent slackening of economic
growth.

Business net borrowing at commercial banks and in the commer-

cial paper market, after slowing in October, turned negative in November
before apparently recovering moderately in early December.

Offerings

of longer-term securities by nonfinancial corporations remained light
in November and December.

Installment borrowing by households weakened

noticeably in October and November, and mortgage lending fell sharply
in November.

Treasury borrowing on the other hand, was comparatively

heavy in the fourth quarter, reflecting a large fourth-quarter deficit,
and state and local financing remained sizable.
The monetary aggregates grew at a reduced pace during the final
quarter of 1979.

M-1 advanced at about a 5-1/2 percent annual rate in

December and 5 percent for the quarter as a whole.

M-2 growth deceler-

ated during the quarter, reflecting the moderation in M-1 and a slowing
in the interest-bearing component of the broader aggregate.
Monetary Aggregates and Bank Credit
Despite the moderate pickup of M-1 growth in December, the fourth
quarter gain was only about half the 9-3/4 percent advance in the third
quarter.

The slower pace of economic expansion and the attraction of

unusually high nominal yields on interest-bearing assets damped growth
of M-1 during the quarter.

The impact on M-1 growth of movements into

ATS and NOW accounts meanwhile was negligible.

III-4

MONETARY AGGREGATES
1
(Seasonally adjusted annual rates of growth)

'78
Q4 '78
to
to
Dec. '79e Q4 '79e
Dec.

1979

Q1
Q2
Q3
Q4e Nov.
Dec.e
Major monetary aggregates
1.
M-1
-2.1
7.6
9.7
4.9
1.0
5.4
5.4
5.1
2.
Currency
9.1
8.1
11.1
8.5
4.6
5.7
9.0
9.5
3.
Demand deposits
-6.2
7.5
9.2
3.4
-0.4
5.3
4.0
3.5
4. M-2
1.8
8.6
12.0
8.9
6.1
6.1
8.3
8.0
5. M-3
4.7
7.9
10.5
7.8
5.5
6.4
8.0
8.0
Bank time and savings deposits
6.
Total
8.4
1.2
9.0
14.6
15.5
4.4
8.3
8.5
7. Other than large negotiable
CDs at weekly reporting banks
4.5
9.3
13.6
11.7
9.6
6.8
10.3
10.1
8.
Savings deposits
-9.6 -3.1
5.5 -13.4 -34.7
-10.2
-6.0
-5.1
9.
Individuals 2
-9.4 -2.9
6.3 -12.2 -32.4
-9.1
-5.4
-4.5
10.
Other 3
-13.0 -8.1
-2.7 -30.3 -52.2
-18.2
-13.3
-13.0
11.
Time deposits
15.6 18.5
19.2
28.6
37.9
17.0
22.8
22.0
12.
Small time 4
16.5 36.3
26.9
30.3
45.5
30.7
33.0
30.4
4
13.
Large time
13.6 -12.1
4.5
24.6
21.3 -11.5
5.5
7.7
14. Time and savings deposits subject to rate ceilings (8+12)
2.2 15.1
15.9
8.4
6.4
11.5
11.6
10.8
Deposits at nonbank thrift institutions 5
7.5
7.9
6.8
8.4
6.4
4.3
6.8
Total
8.8
15.
16.
Savings and loan associations
11.3
7.8
9.2
8.9
8.0
9.0
9.4
9.6
17.
Mutual savings banks
4.6
3.1
2.2
0.0
-2.5
-1.7
2.0
2.5
18.
Credit unions
0.8
8.3
19.3
0.7
-6.3
8.5
7.2
7.4
MEMORANDA:
Monthly changes in billions of $
19. Total U.S. govt. deposits 6
-2.0
1.5
0.7
-0.8
-4.5
2.4
-1.9
-0.2
20.
Total large time deposits 7
1.3 -6.3
2.5
3.6
5.9
-1.9
0.3
0.7
21.
Nondeposit funds
5.3
5.0
5.2
n.a.
-5.1
n.a.
n.a.
n.a.
22.
Other 8
2.0
1.3
2.2
n.a.
-5.5
n.a.
n.a.
n.a.
23.
Net due to related foreign
institutions
3.3
3.7
3.0
n.a.
0.3
n.a.
n.a.
n.a.
e-estimated.
n.a.-not available.
1. Quarterly growth rates are computed on a quarterly average basis.
2. Savings deposits held by individuals and nonprofit organizations.
3. Savings deposits of business, government, and others, not seasonally adjusted.
4. Small time deposits are time deposits in denominations less than $100,000. Large time
deposits are time deposits in denominations of $100,000 and above excluding negotiable
CDs at weekly reporting banks.
5. Growth rates computed from monthly levels are based on average of current and preceding
end-of-month data.
6. Includes Treasury demand deposits at commercial banks and Federal Reserve Banks and
Treasury note balances.
7. All large time certificates, negotiable and nonnegotiable, at all CBs.
8. Domestic nondeposit borrowings of commercial banks from nonbank sources include Federal
funds purchased and security RPs plus other liabilities for borrowed money (including
borrowings from the Federal Reserve), and loans sold, less interbank borrowings.

III-5

Time and savings deposit flows at commercial banks in November
and December continued to exhibit the wide monthly swings typical of the
past year.

On balance, growth in the interest-bearing component of M-2

was less rapid in the fourth quarter than in the third.

While the time

deposit portion strengthened, there was a large contraction in savings
deposits-an outflow that apparently crested in November at a record
$6-1/4 billion.
Particularly strong growth for small time deposits at banks in
the fourth quarter was fueled entirely by MMCs.
since

In the year and a half

MMCs were introduced, they have more than accounted for the cumu-

lative growth in small time deposits, and by October had reached 40 percent of the outstanding stock of these deposits (see chart on page 111-6).
Net issuance of MMCs abated somewhat following October's record $15
billion increase, although substantial sums reportedly remain in savings
accounts with balances over $10,000 which could be readily converted
into MMCs. 1
MMC issuance at thrift institutions also remained brisk in November,
though below the October pace, while large net withdrawals were made from
passbook accounts.

Fragmentary data suggest that this disparity may have

moderated somewhat at S&Ls in December, as at banks.

S&Ls continued to

rely heavily on large time deposits in November, but reportedly cut back
on their issuance in December.

Overall, growth in thrift deposits-and

1. Beginning January 1, 1980, depositary institutions have been authorized to offer a new floating rate certificate with maturities of 2-1/2
years or more. The certificate has no required minimum denomination,
and the maximum nominal rate is set for thrifts at 50 basis points below
the market yield on a 2-1/2 year Treasury obligation (75 basis points
for commercial banks). Also effective on this date, the rate ceiling
on 90-day to 1-year deposits has been increased by 25 basis points.

III-6
At
Banks
Small-Denomination Time Deposits Commercial
by Original Term to Maturity
Siellcs of
dollars

/!

Znder four

-

135

I

-

115

C5

'-nder four years
excluci.g -. Cs

S

Over four
years

-- 5

I

il''

I

I

III-7

in M-3-slowed during November, then apparently picked up a little in
December.1
At the same time that savers were acquiring additional MMCs and
reducing their fixed-ceiling deposits in the fourth quarter, they were
also expanding their holdings of nondeposit assets sharply further.
Money market mutual funds, for instance, swelled by $3 to $4 billion a
month during the final quarter, and in November noncompetitive tenders
at 3- to 6-month Treasury bill auctions reached their highest monthly
total of the year before slowing somewhat in December.
Managed liabilities at banks rose less than $1 billion in November,
well below the nearly $6 billion increase in the previous month.

As in

October, the increase in managed liabilites was entirely in the form of
large-denomination time deposits issued in domestic markets, which
expanded $6 billion before contracting in December; nondeposit funds,
principally repurchase agreements, declined in November (December data
are unavailable).

Some banks reportedly were attempting to keep managed

liabilities from rising above base levels in order to avoid incurring
marginal reserve requirements.

A number of large member banks, particu-

larly those with weak loan demand, have remained under this base, as
have most U.S. agencies and branches of foreign banks, since late November.

For all banks, managed liabilities subject to marginal reserve

requirements averaged $5 billion in November-equal to about 2 percent
of all managed liabilities--and declined in December, reflecting in
part a runoff of large time deposits.
1. An appendix in the Greenbook supplement will discuss recent developments regarding S&L liability structures.

III-8

Total reserve growth rebounded to a 15-1/4 percent annual rate in
December, raising the average growth rate over the September-to-December
period to 13-3/4 percent.

This rate exceeded the growth of required

reserves over the same period by 2 percentage points, as excess reserves
doubled over the three months, perhaps reflecting uncertainties related
in part to the new operating procedures.

Despite a December spurt in the

growth of nonborrowed reserves, this reserve aggregate advanced slightly
more slowly than total reserves from September to December, a development
associated with an increase over the three months in member bank borrowing at the discount window.
Total bank credit remained about unchanged in November following a
relatively small advance in October, as an increase in investments offset
a slight decline in total loans, centered in business and security loans.
Mortgage loan growth, which in large part reflected commitment decisions
made before October 6, was only slightly below the pace of other recent
months.
Business Sector Finance
Bank lending to businesses (net of bankers acceptances held) contracted in November, in contrast to double-digit increases earlier in
the year.

Small banks shared in the weakness that had first developed

at large banks and at foreign-related institutions in the previous month.
Slackening business demand for short- and intermediate-term credit was
suggested also by the sharp November drop in commercial paper outstanding
and by the abrupt slowing of growth in total bankers acceptances in
October. 1

This weakness appears to have abated in December.

In the first

1. The new treatment of bankers acceptances in the reported measures of
short- and intermediate-term business credit is presented in Appendix A.

III-9

COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percent changes at annual rates, seasonally adjusted)

Q3
1. Total loans and investments
at banks 2
2.

Investments

1978
Q4

Q1P

Q2P

1979
Q3e

Oct.e

Nov.e

12
months
ending
Nov.e

13.3

12.7

13.3

11.9

15.8

6.4

0.5

12.0

6.4

-1.8

7.6

5.4

8.5

5.5

3.4

5.9

-21.1

2.1

3.8

1.7

1.3

-11.3

3.

Treasury securities

1.2

4.

Other securities

9.4

9.5

10.5

6.2

12.1

7.7

10.8

10.1

15.9

18.2

15.2

14.2

18.2

6.7

-0.3

14.2

22.7

10.4

-3.3

17.1

5.

Total loans 2

-1.7

6.

Business loans

12.7

14.2

20.5

16.6

7.

Security loans

-16.7

-23.3

33.0

38.1

8.

Real estate loans

20.4

17.7

14.6

13.0

14.7

15.4

13.2

15.2

9.

Consumer loans

17.9

15.9

16.3

12.4

7.5

7.3

7.3

11.8

20.8

20.1

27.4

10.0

n.a.

n.a.
17.2

10.

8.7 -148.1 -134.0

-8.0

Total short- and intermediateterm business credit (sum of
lines 13,14 and 15)

11.5

Business loans net of
bankers acceptances 1

12.6

14.4

20.4

16.6

21.7

13.7

-3.0

Commercial paper issued by
nonfinancial firms 3

23.1

17.5

33.5

65.7

69.7

12.7

-33.6

47.1

13.

Sum of lines 11 & 12

13.1

14.6

21.4

20.3

25.7

13.6

-5.8

19.4

14.

Finance company loans to
business 4

5.5

25.0

16.6

17.7

9.4

-5.2

n.a.

.a.

Total bankers acceptances
outstanding

10.0

50.2

24.8

23.3

74.9

8.4

n.a.

n.a.

11.
12.

15.

19.4

e-estimated.
p-preliminary.
n.a.-not available.
1. Average of Wednesdays for domestic chartered banks and average of current and preceding ends of months for foreign-related institutions.
2. Loans include outstanding amounts of loans reported as sold outright to a bank's own
foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding
company (if not a bank), and unconsolidated nonbank subsidiaries of the holding company.
3. Average of Wednesdays.
4. Based an average of current and preceding ends of months.

III-10

three weeks of the month, outstanding business loans at large banks were
about unchanged, and commercial paper issuance picked up significantly. 1
The slowdown in business lending at banks in November reflected
curtailed availability of credit, as well as reduced demand, according
to the Senior Loan Officer Opinion Survey of Bank Lending Practices
taken in mid-month.

Two-fifths of the respondent banks-about double

the number in August--expressed a reduced willingness to extend business
loans, and a large number reported tighter standards of creditworthiness
and more stringent compensating balance requirements.

Consistent with

these tighter policies, the Survey of Terms of Bank Lending for November
indicated that fewer loans were being made without prior commitment and
that a higher proportion carried floating rates. 2

Moreover, there was a

substantial decline in the proportion of short-term loan extensions made
below prime at large banks.
Gross public offerings of corporate bonds in November and December
fell substantially below the average monthly levels of the second and
third quarters, a decline that occurred in the face of deterioriating
balance sheet conditions.

Most measures of corporate financial position

indicated weakness on a par with 1974 experience.

Corporate bond under-

writers have generally attributed the recent low volume of industrial
debt financings to a widespread reluctance to issue longer-term debt at
1. December loan volume included a $1.1 billion loan to Shell Oil
Company by a syndicate of 25 U.S. banks to finance the purchase of
Belridge Oil.
2. Unused loan commitments to business firms rose sharply for the
second consecutive month in November, likely reflecting concerns of
C&I customers regarding the future availability of bank credit.

III-11
GROSS OFFERINGS OF CORPORATE AND FOREIGN SFCURITIES.
(Monthly totals or monthly averages, in millions of dollars)

1979
H1

Q3p

Q4 p

1980
Nov.

p

Dec.p

Jan.f

Feb.f

Seasonally adjusted
Corporate securities--total

4,335

4,275

3,450

3,200

3,175

3,525

3,100

Publicly offered bonds

2,125

2,350

1,800

1,400

1,650

1,750

1,600

Privately placed bonds

1,555

900

1,000

1,000

1,000

1,000

900

655

1,025

650

800

525

775

600

1,900

1,500

300

300

Stocks

Not seasonally adjusted
Publicly offered bonds--total
By quality
Aaa and Aa
2
Less than Aa
By type of borrower
3
Utility
Industrial
Financial
Foreign securities--total
1.
2.
3.
4.
p.
f.

4

2,280

2,075

1,850

1,450

1,400

1,225
1,055

1,250
825

950
900

650
800

650
750

700
635
945

575
850
650

1,080
575
195

1,325
125
0

670
300
430

408

517

435

375

0

Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes equipment trust certificates.
Includes both publicly offered and privately placed issues.
Preliminary.
Forecast.

III-12

near-record interest rates.1

A relatively light volume of financial

issues in the fourth quarter partly reflected a slowdown in offerings of
mortgage-backed bonds by S&Ls.
Private placements of corporate bonds appear to have remained well
below the $1.6 billion pace recorded in the first half of 1979.

Because

corporate bond commitments are currently low at life insurance companies
(the principal investor in private placements), takedowns are unlikely
to recover substantially in coming months.

Life insurance industry repre-

sentatives cite a comparatively large volume of mortgage commitments outstanding and the expectation of a somewhat slower growth in cash flow as
reasons for the reduced pace of corporate bond acquisitions.

In addition,

policy-loan extensions have climbed dramatically since October 6, thereby
reducing total investable funds.

The proportion of funds diverted to

policy loans, however, has probably been below the near-record share
recorded in the third quarter of 1974.
Although fluctuating rather widely, corporate bond yields have
changed little on balance since the November FOMC meeting.

Rate spreads

between quality categories of corporate bonds have widened somewhat in
recent weeks, however.

These spreads are generally about twice as large

as they were prior to October 6, though well below levels reached in midOctober.
Most major stock price indexes have risen about 3 to 10 percent
from their levels at the time of the November FOMC meeting.

A somewhat

1. Exclusion of IBM's $1.0 billion note and bond financing, which was
publicly offered by underwriters on October 4, would reduce the fourth
quarter average of industrial debt issues to the smallest volume since
1973.

III-13

reduced slate of new equity offerings in December was again dominated
by public utility issues.
Government Debt Markets
With the federal budget moving substantially further into deficit
in the fourth quarter and with a large deficit also projected for the
first quarter, the Treasury raised an estimated $18 billion in new cash
during the October-December period.

Given the large need for new money

at a time when a sizable volume of coupon issues was maturing, the
Treasury for the first time since 1976 began to make significant net
additions to the weekly bill auction.

New funds raised in this manner

totaled $3.7 billion for the quarter.

The Treasury also issued about

$7.3 billion of cash management bills dated to mature in the spring, substantially above the volume of such bills issued in other recent fourth
quarters.
Borrowing by the federally sponsored credit agencies totaled a
relatively strong $2.3 billion in November, after seasonal adjustment,
and is estimated at about $3.0 billion in December.

Borrowing by the

Federal Home Loan Banks to rebuild liquidity, by FNMA to finance mortgage
acquisitions, and by the Farm Credit Banks to meet intensified credit
demands all contributed to the continued strong growth in federal agency
indebtedness.

For the full fourth quarter, borrowing by the sponsored

credit agencies amounted to about $8.3 billion-the largest quarterly
volume ever recorded--and this brought total agency borrowing for the
year to a record $23.9 billion.

III-14

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

1979
H1

Q3

Q4

1960

e

Nov.

e

Dec.

e

Jan.f

e
Feb.f

Seasonally adiusted
State and local government
securities, gross offerings
Total
Long-term
Short-term

5,057
3,337
1,720

5,486
3,586
1,900

5,700
4,300
1,400

6,200
4,250
1,950

5,668

5,100

4,015
1,630

3,000
2,100

4,300
2,700
2,100

3,278
2,219

1,688
734

3,892
2,767

8,105
2,315

3,237
3,035

3,705
1,935

10,927
2,942

U.S. government securities,
net offerings
U.S. Treasury
Sponsored agencies

Not seasonally adjusted
State and local government
securities, gross offerings
Total
Long-term
Short-term

5,409
3,527
1,382

5,266
3,381
1,385

5,200
4,000
1,200

6,000
4,200
1,S00

4,600
3,300
1,300

4,600
3 ,000
1,6C0

4,600
2,300
1,300

1,966
2,390

2,168
1,308

5,989
2,468

10,060
1,894

5,425
2,353

2,300
1.350

14,400
2.325

government securities,
g..
net offerings
U.S. 'reasury'
Sponsored agencies
1.

arketable issues only.

e

-

z

= :orecast.

esrtIrse.

III-15

A large volume of new state and local government bond issues has
been absorbed in recent weeks.

Yields on tax-exempts nonetheless have

edged downward on balance, with dealers reporting continued strong demand
for tax-exempt securities from banks and casualty insurance companies.
The decline in municipal bond rates has kept the ratio of tax-exempt to
taxable yields close to its historic low recorded in October of 1979.
Offerings of tax-exempt bonds averaged $4.1 billion per month,
seasonally adjusted, in November and December, somewhat less than in
October but well above the $3.4 billion monthly average of the first
three quarters.

About one-half of the increase in bond offerings for

new capital in the fourth quarter was attributable to a rise in housing
revenue bonds.

These issues averaged about $1.0 billion per month,

divided nearly equally between single- and multi-family housing issues.
The single-family issues are still coming to market under rules established last April for bond offerings that were under way at that time,
when restrictive legislation was first proposed.
$4.1 billion of these bonds have been sold.

Since then, about

A more recent legislative

proposal would liberalize the transition rules sufficiently to permit
an additional $10 billion of single-family mortgage revenue bonds to
be sold, according to estimates released by the House Ways and Means
Committee.

For 1979 as a whole, states and localities raised $10

billion through housing revenue bonds, $7 billion of which was used
for single-family housing.
Dealers reported that a portion of the increased volume of new
capital issues other than housing revenue bonds represented offerings

III-16

that had been delayed earlier in the year, when interest rates had been
expected to decline.
Mortgage Markets
Commitment policies at mortgage lenders have tightened markedly
since October.

The proportion of major lenders offering commitments for

conventional home mortgages was down sharply in early November for all
loan-to-value ratio classes (see chart on page 111-17).

Special FHLBB

surveys of large S&Ls suggest that, although some associations liberalized their commitment policies in late November and early December
following an earlier pronounced tightening or complete closedown, S&L
commitment policy generally remained much more stringent than in September
and early October.1 Data for all operating S&Ls indicate that mortgage
commitments outstanding (including loans in process) declined by 10 percent during November to $29.3 billion, and that new commitment volume
fell by more than 40 percent.

New commitments dropped sharply in each of

the 12 FHLBank districts.
In a late-November Federal Reserve survey of commercial banks usually active in the home mortgage market, about two-thirds of respondents
reported that they had tightened their mortgage lending policies after
October 6, primarily by increasing effective interest rates charged
(where permitted by existing ceilings).

A mid-December survey of

economic and financial developments by the research directors of the
Federal Reserve Banks suggested that mortgage lending had fallen sharply,
1. These surveys were conducted as part of a study (coordinated by the
Council of Economic Advisers) of changes in mortgage commitment policies
at major lenders subsequent to October 6.

PERCENT OF RESPONDENTS OFFERING MORTGAGE COMMITMENTS FOR
o

PURCHASING NEW HOMES. AT

SELECTED LOAN-TO-PRICE RATIOS

Loan-to-price ratio

75 percent
y-

0-

\I

\

\

80 percent

,a
0

\90

percent S\

-)

_

•r ',973

I'"

9'4

I

975

I"971976
91975
7 e9

Source:

1978
1p7e

1979

Federal Home Loan Bank Board survey of S&Ls, commercial banks, savings

banks, and mortgage companies offering 25-year home loans,

)

III-18

INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS
AT SELECTED
S&Ls
--

Period
1979--High
Low

Conventional home mortgages
Average rate on
Basis point
new commitments
change from
for 80% loans
month or
(percent)
week earlier
12.90
10.38

Dec.

in short supply
54

11.09
11.30
11.64

+160

77

+143
+79

83

+138
+140
+139
+142
+173

85
88

)
30

12.80
12.85
12.80
12.80
12.90

7r
14>
21I
28!

12.90
12.90
12.90
12.90

+174

84
87
85
85

1979-Aug.
Sept.
Oct.
Nov.

Percent of S&Ls 2
with mortgage funds

Spread1
(basis
points)
+174
+64

i
9>
it
16I
23I

83

86

88
82

+153
+155
+150

1. Average mortgage rate minus average yield on recently offered Aaa utility bonds.
2. Percent reporting supply of funds slightly or substantially below nurmal seasonal
patterns.
SECONDARY HOME MORTCAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Yields on GNMAConventional
Government-underwritten
guaranteed
mortgage-backed
Yield
Yield
securities for
Amount
Amount
to
immediate
to
(S millions)
(S millions)
1
1
Period
delivery2
Offered Accepted
FNMA
Offered Accepted FNMA
1979-High
13.29
448
454
172
11.77
13.97
1,035
Low
19
18
10.92
10.42
9.51
37
19

1979--Nov.

Dec.

5
13
19
26
3
10
17
26
31

274

137

13.97

169

12.93

92

53

13.35

96

12.57

207

73

12.98

119

12.42

206

80

12.99

131

12.55

11.73
11.51
11.69
11.36

11.29
11.18
11.49
11.39
11.39

1. Average gross yield before deducting fee of 38 basis points for mortgage servicing.
Data, based on 4-month FNMA purchase commitments, reflect the average accepted bid
yield for home mortgages, assuming a prepayment period of 12 years for 30-year loan
without special adjustment for FNMA commitment fees and related stock requirements.
Mortgage amounts offered by bidders relate to total eligible bids received.
2. Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FMA-VA mortgages carrying the prevailing ceiling rate on such loans.

III-19

as potential borrowers were deterred by higher interest rates and by more
stringent nonrate terms.
Special surveys of mutual savings banks and mortgage companies
also revealed substantial tightening of lending policies.

The mortgage

companies reported that the supply of funds for FHA/VA lending continued
to be adequate, primarily because the GNMA-guaranteed mortgage-backed
securities provide access to the general capital markets.

However, they

also reported that the demand for FHA/VA funds had weakened considerably
owing to high yields required by investors and substantial discounts on
loans bearing the current 11-1/2 percent ceiling rate.

The availability

of funds for conventional loans at mortgage companies apparently has been
sharply reduced as permanent investors have cut back the volume of purchase commitments issued to mortgage bankers.
Average interest rates at S&Ls on new conventional mortgage commitments have remained at the exceptionally high levels reached in early
November, while secondary market yields have dropped below their earlyNovember highs.

In view of high market yields on competing investments,

constraints posed by state usury ceilings on conventional home mortgage
lending have remained intense.

During December, 16 states had fixed

ceilings below national average mortgage yields, and in several other
states floating rate ceilings tied to Treasury yields were below going
mortgage yields.

However, on December 28 the President signed into law

a bill that temporarily exempts from state usury limits conventional
first mortgages made by most types of lenders for the purchase of residential property.

Unless revoked by state action, the exemption will

III-20

apply until March 31, 1980, and covers new mortgage commitments made, as
well as loans closed, during the suspension period.
Consumer Credit
Despite considerable variability since mid-year, growth in consumer
installment credit outstanding has tapered off substantially, on balance.
Expansion averaged around an 8 percent annual rate in October and November,
the slowest pace since 1975.
credit.

The slowdown was most pronounced for auto

New loan extensions by credit unions fell in both months,

reflecting limitations on lending because of liquidity problems.

The

amount of installment loans outstanding at credit unions contracted in
October for the first time in over seven years and apparently was down
further in November.
During the fourth quarter, sharply increasing costs of funds gave
impetus to less accommodative consumer loan policies--especially in
states where finance rates were subject to restrictive rate ceilings.1
Commercial banks rationed supplies of consumer credit to a greater
extent than before, judging from results of the latest Survey of Senior
Bank Loan Officer Opinion.

Forty-one percent of the mid-November sample

responded that they were moderately less willing or much less willing to
make installment loans to individuals than they had been three months
earlier.

Reports in late December from the research directors of several

Federal Reserve Banks confirm an upgrading of consumer lending standards.
Sharply higher consumer finance rates also reveal a movement towards
less accommodative policies.

Finance rates on selected types of closed-

1. The structure of state regulations affecting consumer installment
rates is discussed in Appendix B.

III-21

CONSUMER

INSTALLMENT

CREDIT 1
1979

Nov.

1977

1978

Q2

Q3

Oct.

35.3
18.2
52.9

44.8
19.4
53.1

39.9
14.1
47.8

37.3
12.8
32.7

26.2
8.7
35.3

22.2
7.3
15.3

Extensions
Billions of dollars
Bank share (percent)

254.1
46.4

298.4
47.8

324.2
47.9

332.3
45.9

332.3
45.9

320.9
43.9

Liquidations
Billions of dollars
Ratio to disposable income

218.8
16.8

253.5
17.4

284.3
17.8

294.9
18.0

306.1
18.4

298.6
17.8

Change in outstandings
Billions of dollars
Percent

15.2
22.5

19.6
23.6

13.2
12.3

12.1
11.0

5.8
5.2

3.9
3.5

Extensions
Billions of dollars

75.6

89.0

93.7

94.2

92.1

88.5

Total
Change in outstandings
Billions of dollars
Percent
Bank share (percent)

Automobile Credit

1. Quarterly and monttly dollar figures and related percent changes are
seasonally adjusted annual rates.
p - preliminary.

FINANCE RATES O CONSLUMER
INSTALLMENT CREDIT AT COM!ERCIAL BANKS
(Annual percentage rate, not seasonally adjusted)

November

Change in
basis points

1979
Type of loan

August

New automobile (36 mo.)

11.88

12.85

+97

Mobile home (84 so.)

12.65

13.51

+86

Other consumer goods
24-month
12-month

13.76
14.02

14.39
14.56

+63
+54

Note: Figures are for "most common" rates on direct loans made during the
first week of the month.

p

III-22

end consumer installment credit at a sample of commercial banks increased
by record amounts between August and November of 1979.

The average

finance rate on new-car loan contracts at finance companies rose sharply,
too, nearly equalling the previous largest 3-month rise.

The sizable

rate hikes from August to November suggest that finance rates may be
approaching their statutory limits in an increasing number of states.

APPENDIX A*
TREATMENT OF BANKERS ACCEPTANCES IN THE MEASURE OF SHORT AND INTERMEDIATE
TERM BUSINESS CREDIT
A bankers acceptance-which is a negotiable time draft maturing in
less than nine months, guaranteed by a bank, and drawn to finance the
shipment or storage of goods--is a financial instrument with characteristics akin to both a business loan and a short-term security. On the one
hand, bankers acceptance financing generally is treated like a straight
loan in a bank's negotiation of a line of credit with a business borrower. And, if an acceptance, when created, is then bought and held in the
portfolio of a bank, it represents funds extended by the bank to a C & I
customer. On the other hand, there is an active secondary market in
bankers acceptances, and in most instances banks can treat these acceptances like any other short-term security.
Acceptance financing of trade has grown rapidly in recent years, a
development not adequately captured by the previous measure of shortand intermediate-term business credit. The previous measure included
only those acceptances held in commercial bank portfolios (and therefore reported as business loans). This procedure had two major shortcomings. First, it failed to reflect the rapid growth in recent years
of total acceptances outstanding, since most of the acceptances created
were held by nonbanks (see chart on page A-3).
Second, movements in the
old measure sometimes were influenced by factors other than business
credit market conditions, as banks altered their holdings of bankers
acceptances to reduce taxes.1/
The new measure of short- and intermediate-term business credit includes business loans at domestically chartered commercial banks and at
U.S. branches and agencies of foreign banks less bankers a ceptances held
at large commercial banks and foreign related institutions plus

1. In 1975-77, some banks boosted their holdings of acceptances at yearend
in order to enlarge C & I loan totals and thus to increase loan loss provisions to reduce income taxes. Acceptances held then ran off sharply
at the beginning of each subsequent year. In the past two years, there
has been less of an incentive to manipulate their acceptance portfolios because loan growth has been sufficient to build up the loan loss
provision and because changes in the tax laws have made the artificial
buildup less profitable.
2. No data are available for acceptances held at small banks. However,
the amount held at these banks is estimated to be relatively insignificant.
*
Prepared by Perry D. Quick, Senior Economist, Banking Section,
Division of Research and Statistics.

A-2

commercial paper of nonfinancial businesses plus business loans at
finance companies plus total bankers acceptances outstanding (columns
(1), (7), (8) and (9) of table). The series for acceptances outstanding
is from the New York Federal Reserve Bank survey of over 300 commercial
banks and foreign-related institutions whose acceptances are traded
regularly in the New York market.
In the first ten months of 1979, short- and intermediate-term
business credit grew at a 23 percent annual rate (column 10). The rate
of expansion of this measure has been falling since August, and is
expected to be negative in November.

A-3

Bankers Acceptances
Monthly Averages. Seasonally Adjusted

of
Billions

dollars
45

40

TOTAL ACCEPTANCES OUTSTANDING
35

30

25

20

15

10
ACCEPTANCES HELD BY COMMERCIAL BANKS

S

1973

1974

Ltf ob .erOton - October 197

1975

1976

A-4
SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
Seasonally adjusted monthly averages1
To tal

s

Business Loans at Comercial Banks
Business

Large

Total

Banks
Excluding
Bankers
Excluding
Accep- 2
Accep- 2
tances 3 tances 3
(1)
(2)

Loans

ForeignRelated
Institutions
Excluding
Acceptances
(3)

Sall
Banks
(4)

Total
Acceptances
Held*
(5)

Total
Including
Accep2
tances

(6)

Comercial
Paper

of ';on3

financial
Business

(7)

Buainess
Loans at
rinance
Companies
(9)

Toral
Short a
Inter sd
cances
iate-tar
OutBusines
scanding
Credit
(9)
(IC)

anxers
Accept-

Level in Billions of Dollars
7

8--December

241.7

123.4

25.0

88.3

6.8

248.5

19.1

62.8

32.3

355.9

1979-February
arch
April
May
June
July
August
September
October
November e

251.9
255.1
258.7
262.1
265.7
:70.2
274.6
280.1
283.3
282.6

132.8
134.1
137.7
1.0.2
142.1
1-4.7

26.4
27.2
27.9
28.5
29.6
30.9
32.2
33.6
34.2
34.4

92.7
93.8
93.1
93.4
94.0
94.6
95.2
96.4
98.0
98.6

7.6
7.2
7.3
7.3
7.5
8.1
8.0
8.6
8.0
7.8

259.5
262.3
266.0
269.4
273.2
278.3
282.6
238.7

19.8
20.7
22.0
23.5

64.5
65.4
66.3
67.2
68.3
69.7
70.8
69.9
69.6
n.a.

33.8
34.3
34.5
35.1
36.3
38.1
41.2
43.1
43..
a.a.

370.3
375.5
381.5
387.9
394.4
403.8
413.3
421.4
424.9
n.a.

19

147.

150.1
151.1
149.6

291.2

290.4

24.1
25.8
27.2
28.3
28.6
27.8

Annual ?ercentage Rate of Change
9

1 73-Year
1974-Year
7
19 5-Year
1976-Year

22.2
18.9
-5.1
3.3

197'-Year

11.1

197S--Year

17.8

1?79-First Itr
Second Qtr
Third Qtr

20.4
16.6
21.7

1978--ctober
'ovember
December

19.2
17.9
7.6

197

9

-January
February
'arth
April

May
June
July
Augus:
Sepcember
October

Nlovember
n.a.--oc

e

14.3

26.7
18.4
15.1
16.9
15.8
16.3
20.3
19.5
24.,
13.7
-3.0

available.

16.5

32.2
21.8
16.3
22. 6
20.7
22.6
8.0
-11.9

16.9
11.2
4.4
8.8
16.1
14.2

4.3
45.8
68.6
32.2
-3.8
-9.3

21.8
19.3
-3.3
1.3
10.5
16.3

35.2
35.3
54.1

24.9
0.9
10.2

29.9
16.7
58.7

20.5
16.6
22.7

33.5
65.7
69.7

16.6
17.7
9.4

24.8
23.3

10.8
64.0
65.8

25.5
20.8
5.5

35.8
-17.4

0.0

17.5
16.8
7.8

39.3
0.0
12.7

14.2
32.1
27.4

41.2
68./
34.4

33.6
32.7
36.4
30.9
25.3

42.1
17.1
14.2
-9.0
3.9
7.7
7.7
7.6
13.1
19.9
'.3

35.3
102.9
-63.2
16.7
0.0
32.9
96.0
-14.3
90.0
-83.7
-30.0

26.9
20.7
12.9
16.9
15.3
16.9
22.4
18.5
25.9
10.4
-3.3

6.3
37.5

17.2
15.1
16.7
16.5
16.3
19.6
2-.6
18.9
-15.3
-5.2
n.a.

46.3

52.7
5C.!
52.2
21..
7.0

15.4
57.8
-22.5
21.8
14.9
24.0

54.5

75..31.8
30.6
84.6
65.2
48.5
12.7
-33.6

15.0
108.2
1.7
17.8
15.1
32.4

7..9

e-estiatced.

SBusiness loan and acceptances data in columns 1-6 are monthly averages and reflect prorated averages of eaonesay da
for domestic chartered banks and averages of current and previous month-end data for foreign-related insiltu:ions.
.Comercial paper reflects prorated averages of ednesday data.
Susiness loans : finance :ompanies and aniers ace
cances outstanding in :olumns 8 and 9 reflect averages of current and preceding onth-end data.
' Adjusted for loans sold co banks' affiliates.
3/ Effective December 31, 1978, business loans were increased by S600 million as :he result 3f a S700 million upward
reclassification in loans offset in part by a $100 million decline due to balance sheet :eclassifications.
ffectianuary 3, 1979, as the result of reclassifications, business loans were Increased bv SC.
Excludes acceptances held at small banks, for which no data are availaole. Includes a small amount of ommercial p.
holdings.
5'

Sum of

columns

,. 7,

8.

and 9.

APPENDIX B*

RATE CEILINGS ON CONSUMER INSTALLMENT LOANS

Recent record increases in finance rates on closed-end consumer
installment loans at commercial banks, and similar large increases at
finance companies, appear to confirm trade reports that rising costs
of funds have exerted strong upward pressure on rates.
Other reactions
to cost pressures, especially in states where statutory ceilings have
hindered rate adjustments, have included greater reliance on tightening
Such curtailment of credit availlending standards and nonrate terms.
ability may partly explain the weakening of consumer credit growth since
midyear, which became more pronounced in October and November.
Rate ceilings on consumer loans typically are set by special
statutes enacted by states as exceptions to a general state usury law.
These consumer credit rate ceilings usually remain fixed from year to year
unless changed by legislative amendment. However, federal law permits
national banks to charge a rate one percentage point above the Federal
Reserve discount rate, regardless of state limitations. 1
The rate ceilings enacted by state legislatures have created a
complex structure of rate limits on consumer credit.
Within a given
state, rate ceilings typically vary not only for different types of consumer credit, but also for particular sources and for various amounts of
credit. Rate ceilings also differ considerably among states.
These
variations are illustrated in the table on page B-2 for specific types of
loans in five selected states.
Separate statutes ordinarily govern maximum rates on installment
sales financing and on cash loans.
Laws limiting rates on the closedend credit sale of goods often distinguish between motor vehicles and
other goods.
All but four states have special rate ceilings for credit
card balances, and maximum rates on overdraft credit are sometimes separately established.
Rate ceilings on cash loans nearly always differ for commercial
banks as compared with "small loan" finance companies.
This distinction
recognizes the higher risk and servicing costs associated with small
loans to a generally more risky clientele.
In the case of credit unions,
all federally-chartered and most state-chartered institutions face a

flat 12 percent rate ceiling on consumer loans.
1. P.L. 96-161, effective in late December, relaxed state usury ceilings

for certain business and agricultural loans through June 1980 and susspended them for most home mortgage loans through March 1980, unless
reestablished by state action. Consumer credit rate ceilings were not
affected.
*Prepared by James T. Fergus, Economist, Mortgage and Consumer Finance

Section, Division of Research and Statistics.

MAXIMUM PERMITTED FINANCE RATES (APR)
FOR SPECIFIED CONSUMER LOANS IN SELECTED STATES

New-car

Consumer
durable

Bank
credit
card

Personal cash loan
Commercial Finance
bank
company

$200

$4,000

$700

$4,000

$1,000

36-mo.

24-mo.

36-mo.

24 -mo.

balance1

California

21.20

18.16

none 2

17.68

18.00

New York

13.38

17.17

13.38

21.75

18.00

Ohio

15.443

21.083

18.79

26.15

24.00

Pennsylvania

13.384

14.68

13.38

22.67

15.00

Virginia

24.00

24.00

13.97

26.42

18.00

State

1. Since there typically is no finance charge on bank credit card
accounts during the initial billing period, the effective rate ordinarily
is somewhat below the rate limit permitted on balances on which interest
is paid.
2. No maximum rate specified for commercial banks, which are constitutionally exempted from usury law that might otherwise apply.
3. Includes "acquisition fee," and other fees where applicable.
4. Maximum rate for commercial bank direct loans, as governed by the bank
installment lending statute. Pennsylvania law also allows state-chartered
banks to lend at rates permitted national banks by the National Banking
Act.

NUMBER OF STATES WITH INDICATED STATUTORY RATE CEILINGS ON
NEW AUTO LOANS AT COMMERCIAL BANKS 1
Rate ceiling
(annual percentage rate)

Number of

states 2

10 to 13
Over 13 to 15
Over 15 to 18
Over 18 to 24
1. $4,000, 36-month direct loan.
Rates for other lenders would be the
same in most states.
2. Including the District of Columbia.

Rate limits by loan size may be either uniform or graduated. Under
a graduated rate ceiling one rate limit applies to the portion of a loan
below a certain dollar amount. Then a second, lower ceiling rate is set
on additional sums loaned in excess of that amount. Rate ceilings with
three or more levels are fairly common. Under a graduated rate ceiling,
of course, the gross return on funds loaned will fall if the typical loan
amount increases beyond the point at which a lower rate maximum takes
effect. If larger loans do not yield sufficient offsetting reductions
in average costs, lenders may choose to curtail the amount of consumer
credit they will extend and shift resources to alternative uses.
Statutory rate limitations that currently apply to new-auto loans
suggest that ceilings in a substantial number of states may have become
seriously binding as market-determined rates have risen. In the case of
bank direct new-auto loans of $4,000, for 36 months, rate limits are now
at or below 15 percent in 33 states, as shown in the lower table on page
B-2. 1 In 16 of these 33 states, the prevailing rate maximum is 13 percent or less-probably below the marginal cost of lending at many providers
of auto credit.
1. Ceilings are generally expressed as "add on" or "discount" rates,
which convert to effective annual percentage rates that vary with maturity.
In a few states, auto loan rate ceilings vary with loan size. Ceilings
for this type of loan are the same for other lenders as for banks in
most, but not all, states.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets
Over the last two months of 1979 and the first week of the new
year, the dollar's average exchange value declined by 4-1/4 percent.
As shown in Chart 1, this decline entirely reversed the dollar's sharp
rise in October.

On January 3, 1980, the weighted-average dollar

was 1-1/3 percent below its value at the end of 1978, and slightly
below its low point at the beginning of October 1979.
A major factor influencing exchange rate fluctuations over the
final quarter of last year was the relative movement of U.S. and foreign
short-term interest rates.

During October, U.S. interest rates rose

sharply, both absolutely and relative to interest rates abroad.

Over

November and December, however, U.S. short-term interest rates declined
on balance while foreign rates continued to rise;

since the beginning

of November discount rates were increased in all foreign G-10 countries
except France.

By the end of the year, the U.S. three-month CD rate

was only 1-1/2 percentage points above the weighted-average foreign
three-month interest rate, down sharply from a nearly 4 percentage
point differential at the beginning of November and below the level
prevailing when new Federal Reserve monetary measures were announced
on October 6.
The onset of the Iranian crisis in early November also contributed to selling pressure on the dollar, especially the U.S. freeze
of Iranian official assets on November 14 which led to speculation
that other oil exporting countries might become reluctant to hold
dollar-denominated assets.

In December, the meeting of OPEC oil
IV-1

IV-2
CONFIDENTIAL
STRICTLY
CLASS II

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

FOMC

March 1973 -100

.m

1979

3. 1980

IV-3
ministers focused market attention on the sharp escalation of oil prices.

Uncertainty over the impact of these increases, as well as the continuing Iranian crisis and the situation in Afghanistan, led to unsettled
conditions on exchange markets with sharp and volatile fluctuations
in rates.

This heightened uncertainty was also reflected in the very

sharp rise in the gold price.

Gold prices rose by nearly $250 an

ounce in December and early January, moving above the $600 per ounce
level.

Japan's heavy dependence on imported oil and the prospect of higher oil prices combined to generate downward pressure
on the yen relative to all other major foreign currencies.

Conversely,

Britain's oil self-sufficiency was a major factor in the relative
strength of the pound late in the year.
On November 30 the Danish krone was devalued by 5 percent relative
to all other EMS currencies.

Following this realignment, the Belgian

franc moved to the bottom of the EMS currency band and the Belgian
National Bank sold dollars and French francs to support the Belgian
currency.
U.S. intervention since the November green book provided net
intervention support for the dollar equivalent to $1/3 billion, with
sales of German marks at times of downward pressure on the dollar
exceeding mark purchases --

IV-4

U.S. foreign currency
sales to support the dollar were financed equally by the System and
the Treasury while nearly all fdreign currency acquisitions were used
to repay System swap drawings.

As a result, outstanding System swap

debt was reduced slightly to about $3-1/4 billion equivalent.

IV-5

U.S. International Transactions
The trade balance continued to improve in October and November;
the deficit for the two months averaged $26 billion at an annual rate.
Agricultural exports climbed again, reaching an average annual rate of
$41.3 billion in October and November, with most of the increase going
to the Soviet Union.

Transportation bottlenecks have not limited

agricultural exports as much as expected.

Nonagricultural exports

were also above the third quarter level; the average for October and
November was up almost 9 per cent.

The advance was widely based,

with

exports of industrial supplies (e.g., nonmonetary gold and chemicals)
particularly strong.

Accounts
Basis
seasonally adjusted annual rates)

U.S. Merchandise
International
TRade,
(billions of dollars,
1 97

1978r

Year

8r

4Q

1 9 7 9
Oct.

r

3Q

1Q

& Nov.

EXPORTS
Agric.
Nonagrlc.

142.
29.9
112.1

1

5.4
JO.o
134.8

171.2
30.9
140.2

I19.3
J,.4
150.9

:0S.O

Jl.2
12b.S

EXPORTS

17 5

Petroleum

Nonpetroleum
BALANCE

1l.J
f3.b

207.l.O.)
, .

111a

1110.9

.n;0

:l^.«

?) 1 3

42.3

4J.4

4h,6

51.b

6.

71.

77.

133.5

138.2

143.3

150.4

152.0

159.5

l'i .

-33.8

3.9

-24,
2.

- 30-

1

NOTE:
Details may not add to totals becaunse of rounding.
r/ Revised
*/ The Monthly International Accounts figures are only estimates
rough
and are subject to considerable revision.

*/

r*/

Oct. Nov.
.'0:.
. .,
1', .S

I..
.

-0.J

IV-6

U.S. Merchandise Trade
International Accounts Basis
Ratio scale, billions of dollars, seasonally adjusted, annual rate

S260
-240

-- 220

S
IMPORTS

r

/

I

S1

,

-

200

-

180

-

160

140

SEXPORTS

- 120

Bitions of dollars, seasonally adjusted, annual rate

0

TRAOEDE

%

fi

-

20

It

60

1/

V

1

/

I
CIT /

S-40

10

L I ! I I I
1977

1978

! I

t tI I

t It It I I
1979

I

IV-7

Nonpetroleum imports averaged $160 billion (annual rate) in
October and November, up 5 per cent from the third quarter,

Petroleum

imports fell in value to $66 billion in November, after reaching almost $78 billion in October (annual rates).

Volume dropped sharply in

November, as stocks peaked at very high levels early in the month and
then leveled off.

Petroleum unit values continued to climb, reaching

$23.08 in November, up from an average of $20.97 for the third quarter.
Only part of this increase was due to higher official contract prices;
part was due to increases in the percentage purchased at spot market
prices.

It is estimated that more than 15 per cent of U.S. imports

were purchased at prices of $35 to $40 in November.
The U.S. current account for the third quarter of 1979 showed a
surplus of $3 billion (annual rate).

Net investment income increased

sharply from $30 billion in the second quarter to $35 billion in the
third (annual rates).

This increase was mainly attributable to the

growth in earnings on U.S. direct investments abroad, both in petroleum and in other industries.
Turning to capital flows, foreign official reserve assets in the
United States fell by $2.5 billion in October.

Holdings of the OPEC

countries increased by $2.3 billion but holdings of the G-10 countries
and Switzerland fell by $3.5 billion.
of this decrease.

Japan accounted for a large part

Partial data for November and December indicate that

foreign official holdings at the FRBNY declined by $5 billion.

IV-8

.

OPEC holdings at the FRBNY were virtually unchanged in the last

two months of the year.

Private capital flows reported by banking offices in the United
States showed a net inflow of $3.9 billion in October.

The net inflow

was more than accounted for by a reduction in banks' loans to unaffiliated banking offices abroad.

Partial data for November

indicates

that U.S. agencies and branches of foreign banks continued to shift
loans to non-affiliated foreign banks to the books of their offshore
offices.

By shifting such loans to foreign banking offices, agencies

and branches have been able to reduce their Eurodollar managed liabilities, which are subject to the October 6 marginal reserve requirement, by about $3 billion relative to their base levels.
In October the interest rate differential favoring Eurodollar
over domestic CDs widened and added to the existing incentive for U.S.
non-bank residents to place funds offshore.

U.S. non-banks' dollar-

denominated deposits in foreign branches of member banks increased
$2.5 billion in October.

This reversed the September decline and

brought the volume of these holdings to a new high.
holdings of open-ended

Eurodollar CD

money-market mutual funds and short-term

investment trusts continued their recent rapid growth.

unit-

During October

and November, the volume of those holdings increased from $5.4 billion
to $7.8 billion.

RESTtlCTED
(i n

m illions

U.S.
of dollars

;

International
Transactions
rec e i pts, or i ncrease i n liabiliti
1977

Year
1.
2.
3.
4.

Trade balance 1/
Merchandise
exports
Merchandiese
imports

-30,173

120.816

-151,669
I-

4.Change
office

,

I-

_

-3,909

inst.)
official
foregin
to
liab.
(excl.
U.S.
in

7.
8.

9.
10.
12.
12.
13.
14.

15.

16.
17.

18 .

19.

Through interbank transactions
with
a)
Own
in
offices
foreign countries
b) Unaffiliated banking offices in foreign countries
Through nonbank transactions
a) Claims on nonbanks in foreign countries (increas,
b) Liabilities
to
private
nonbanks in foreign
countries (inc. custody liab.)
Private
securities
transactions,net (excl. U.S.
Foreign net purchases of U.S. corp. bonds
U.S. corp. stocks
of
purchases
net
Foreign
U.S. net purchases (-) of foreign securities
U.S.

Foreign
of
purchases
net
in
Change

foreign official

Treasury

Treas.

U .S

. Treas u ry secu rities
Other 3 /
Change in
U.S. reserve assets

21.

All other transactions and

(increase

Oblig.)

(increase +)

Switzerland

20.

-)

obligations
2/

reserve assets in U.S.

By Area
G-10 and
countries
OPEC
All other countries

1978

-34.187
141,884
116,071

-6.369
39,315
-45,664

-16,924

-11.697

, *)

1

I 9 79

(bil.$.

Oct.

-6.115
1.348
-47,463

-7716
42,792
-30.506

-7.22
47,337
-54,619

14.681

4.798

648

9.770

-7.710

374
1

-,649
l.4
16,194% 15,
-18.,843 -14,64

n

-3
17,318
-19.701

-)

statistical discrepancy

-2,718
-2,204

4.940
-4,520

-3,221
-6,423

13,327
818

6,753
-1,266

8,145
-2.246

14,821
-4,920

-7.07
385

954
4.197

-424
1,436

-16,431
1,069

-4.829
176

-1,006
-458

-2,017
1,321

-5,410
159

-2,143
11

-1.396
288

-1.391
124

-116

-537

-71

6

-47

424
-961

142
-2,116

127
-. 43

.y.L
105
17
-1,043

.IT

27
271
-629

-3.068

-688

1f,12

1,117

1,326
-3,506

1,686
-3,491

306s
297
-919

.t

seasonally adj.,

annual rates)

.5M3

970

.34

2,251

1,46

-239

1.79

1)8 .

33,448

31,471

16,653

-86257

-10,293

5.373

989

29,414
S.743
291

29,955
-1,074
2, 90

15,574
1,07)
20

-7.101
-1.645
489

-11.613
34
1,U01

4,821
13,45)
-901

239
1.33
-63)

30,266
.181

23,669
7,602

1,309
3,544

-7,965
-292

-12,799
2,506

5,034
331

987
2

796
29

-237

662

200

446

Z.712

0

1,489
.4

2.105

J5,414

3,081

-1,060

-1,686

9.44j

-14.L
.14.1

-13.1
-33.5

1,58)

2,564

-3.00

4/
72

161
-10
-273
.

825

1,021
-*16
422

3

-2.473

-3,529
2.263
-1,207

-2,30
-43

29

-t

I
MEMO:
Account
Current

9

Aug. Q1 Sept.
Aug.

Q4

r__~l--

banking
of
positions
foreign
net
in

5.
6.

1978
Year

es

.3
.3

1.7
1.7

-4.2
4.2

3.0

1

I..

n.a.

n.8.

3.0

I

n.e.

n.e.

n.e.

IV-10

Foreign Economic Developments.

Economic growth in foreign indus-

trial countries on balance continued to be strong in the third quarter.
Significant gains in real GNP were recorded in Japan, Canada, Italy,
and France.

In Canada, and, to a lesser extent in France, private

domestic demand expanded vigorously; increases in exports and inventories boosted activity in Japan, while a cessation of strike activity
accounted for the Italian gains.

On the other hand, strike activity

in the United Kingdom accounted for much of the 2 percent fall of real
GDP during the third quarter.

In Germany, the third quarter saw a

slowing in the rate of expansion after a 2 percent increase in real
GNP during the second quarter.
Inflation proceeded at a high and, in several cases, rising rate
in most of the major

foreign countries.

Oil price increases, various

special factors, and, for Japan, currency depreciation were important
contributors to the inflationary process.
Since the previous green book, discount rates have been increased
in the United Kingdom, Italy, Canada, Sweden, Norway, the Netherlands
and Belgium.

In several of these countries, the increases were quite

large; the U.K. and Italian rates each rose by 300 basis points, while
the Norwegian rate increased by 200 basis points.

Continuing high

inflation rates generally were cited as reasons for these increases;
exchange-rate considerations and efforts to achieve monetary targets
were more proximate factors in several countries.
Monetary targets recently announced for Germany, the United
Kingdom, Canada, and Switzerland indicate a desire to retard money
supply growth.

The target range for German central bank money is a

IV-11

growth rate between 5 and 8 percent from 1979-Q 4 to 1980-Q4, compared
with the 6 to 9 percent target range for 1979 and the 7.5 percent
growth actually achieved in the year ending in October.

The target

range for sterling M3 growth, currently 7 to 11 percent for the ten
months from mid-June, was extended through next October, but with the
base remaining at the mid-June level.

Thus the rapid growth in ster-

ling M3 -- nearly 14 percent (s.a.a.r.) from mid-June to mid-October -will not be built into the target over the next twelve months.

The

target range for Canadian M1 growth is between 5 and 9 percent from
the second quarter of 1979, compared with the target range of between
6 and 10 percent from June 1978 and actual growth of 7 percent from
June 1978 to November 1979.

Finally, the Swiss National Bank has

announced a target of 4 percent growth in the monetary base for 1980.
The most notable development regarding current-account balances
continues to be the shift towards deficit among foreign G-10 countries.
The combined current-account balances of Germany, Japan, and the United
Kingdom reached a deficit of about $18 billion in the first 11 months
of 1979 compared with a surplus of $26 billion in the corresponding
period of 1978.
Individual Country Notes.

Despite persistent strong inflation

and virtual consensus among forecasters of an imminent slowdown in
the Japanese economy, most recent figures for industrial production
and GNP suggest that the economy is continuing to expand strongly.
Third quarter GNP was about 7-1/4 percent (a.r.) above the preceding
quarter, making it quite likely that real growth in 1979 will reach
at least 6 percent.

The largest gains in

real growth in

the third

Real GNP and Industrial Production in Major Industrial Countries
(percentage change from previous period, seasonally adjusted)

_II__

1~1~

_

_
1978

1976

Canada:

France:

Italy:

Japan:

1978

Q3

-0.2
0.0

0.5
0.5

1.8
4.1

3.5
2.3

1.0
2.9

0.8
0.8

0.4
-0.3

2.0
3.4

1.1
1.9

2.0
1.1

2.6
1.9

0.6
1.0

2.9
6.1

1.1 -0.7
-2.6

1.0
1.1

5.4
4.2

6.0
6.2

0.8
1.3

1.6
2.2

1.5
1.8

1.7
2.4

1.8
2.0

3.1
1.9

2.0
3.8

2.6
3.8

1.1 -0.1
0.8 -1.1

-1.5
-0.7

2.1
5.5

-2.3

5.9
10. 7

5.3
5.9

4.4
5.8

0.9
1.9

0.3
1.0

-0.6
-0.1

0.9
0.1

4.9
9.5

3.0
2.0

3.5
1.9

5.5
7.2

2.6
2.6

GDP
IP

5.9
12.4

GNP
IP

6.4
11.1

__~_~
SG;NI' daia arte not

-1.1

1.9
1.8

GDP

GNP
IP

Jun

0.0
-0.3

1.1
1.8

United States:

Q3

1.3
2.3

3.4
5.3

GDP
IP

1979
Q2

-0.7
-1.2

2.4
4.0

United Kingdom:

Q1

1.6
1.4

5.4
5.1

GNP'
IP

Q4

2.6

GNP
IP

IP
Germany:

1977

_~
published

on monthly basis.

0.7

1.4
1.9

*

*

-0.8
*

0.8
*

-4.5

n.a.

*

2.4
*

3.8
*

3.2
*

3.2

1979
Sept

Aug

Oct

*

*

*

-0.2

2.4

-1.1

*

*

*

0.0

-0.7

*

*

-3.9

0.8

0.0

6.4

3.6

n.a.

1.0

n.

n.a.

n.a.

*

*

*

*

*

*

*

1.1

0.9

-1.5

2.6

*
2.0
2.0 -1.0

-4.0

-0.9
-0.9

2.1

*
-0.7

*
0.5

*
0.0

*
-0.1

*-

n.a.

*

*

-0.1

*

-2.2

0.2

*
0.3

I_

Jul

*

*

2.1

n.a.
*
-0.5

~__

Consumer and Wholesale Prices in Major Industrial Countries
(percentage change, from previous period or as indicated)

1978
1976

1977

Canada: CPI
WPI

7.5
5.1

8.0
7.9

France: CPI
WPI

9.6
7.4

9.5
5.6

Germany: CPI
WPI

4.6
5.8

3.9
1.8

1978

9.2
4.3
2.6
-0.3

1979

Latest 3 Months
from:
Previous
3 Months
Year
(at Ann. Rate) Ago

Latest
Month

Q3

Q4

Q1

Q2

Q3

2.5
2.1

1.6
3.3

2.3
4.9

2.6
3.1

2.0
2.7

n.a.
n.a.

9.1
13.0

9.4
14.6

Nov
Oct

2.7
1.9

2.1
2.9

2.2
4.4

2.8
3.8

3.2
2.8

n.a.
n.a.

12.6
9.9

11.3
13.9

Nov
Nov

0.0
-0.6

0.1
0.1

2.1
3.4

1.6
3.3

1.2
1.7

0.8
n.a.

3.3
3.8

5.7
9.8

Dec
Nov

2.4
1.8

3.0
2.2

3.8
4.4

3.7
4.6

3.5
4.3

n.a.
n.a.

25.2
24.2

17.0
19.1

Nov
Nov

-0.2
1.9

2.2
4.1

0.9
4.9

2.0
n.a.

8.1
18.8

4.9
14.4

Dec
Nov

Q4

Italy: CPI
WPI

16.8
22.9

i 18.4
17.4

12.1
8.4

Japan: CPI
WPI

9.7
5.0

8.3
1.9

4.3
-2.5

United Kingdom: CP
WP

16.6
17.3

15.8
19.8

8.3
9.1

1.7
1.9

1.7
1.7

3.1
2.7

3.7
4.0

6.7
5.0

n.a.
n.a.

16.8
14.4

17.0
15.0

Nov
Nov

United States: CPI
WPI

5.7
4.6

7.6
7.8

2.4
1.5

2.0
2.3

2.5
3.6

3.4
3.6

3.3
3.0

n.a.
n.a.

12.6
15.1

12.3
14.1

Nov
Nov

6.5
6.1

0.8
-1.7

0.2
-0.6

~

a/
Trade and Current-Account Balances of Major Industrial Countries(billions of U.S. dollars; seasonally adjusted)

Q3

Sept

1979
Oct

Nov

0.6
-1.3

0.8
-1.0

0.6
*

0.3
*

n.a.
*

0.3
0.6

-0.4
0.7

-1.4
0.1

-0.4
*

-0.7
*

-0.3

5.6
4.8

4.3
1.4

3.8
-1.1

2.4
-4.2

0.8
-1.4

0.4
-0.4

n.a.
-0.5

-0.8
2.5

0.5
1.7

-0.4
1.1

-0.7
n.a.

-1.2
n.a.

-0.3
*

0.0
*

n.a.
*

6.8
4.8

7.0
4.5

3.9
1.7

2.7
0.3

1.9
-0.7

-0.9
-3.8

-0.5
-1.4

-0.4
-1.2

-0.7
-1.7

-2.2
2.0

-0.3
0.7

-0.7
0.6

-0.1
1.2

-3.2
-2.4

-1.5
-1.3

-0.9
-0.5

-0.3
-0.3

-0.7
-0.6

-0.1
0.0

-33.8
-13.5

-7.9
-3.5

-7.9
-3.2

-6.0
0.1

-6.1
0.4

-7.7
-1.1

-7.3
0.8

-3.1
*

-2.4
*

-2.0
*

Q1

0.6
-1.2

0.7
-1.5

0.6
-1.2

0.2
1.4

0.2
0.9

0.0
1.3

20.6
8.9

4.9
1.8

5.4
0.2

-2.8
2.5

-0.2
6.4

0.3
1.7

17.4
10.9

25.0
16.5

-3.0
0.6
-30.9
-14.1

1978

Q2

2.7
-4.1

3.1
-4.6

0.6
-1.1

-2.4
-3.3

0.6
3.8

Germany: Trade
Current Accountc

16.5
4.3

Italy: Trade
Current Account

Canada: Trade
Current Account
France: Tradeb/
Current Account

b /

c /

Japan: Trade
Current Account
United Kingdom: Trade
Current Account
United States: Trade
Current Account

a/
b/
c/
d/
*

d /

1978
Q3

Q4

1977

1979
Q2

The current account includes goods, services, and private and official transfers.
French annual data is not seasonally adjusted.
Not seasonally adjusted.
Monthly data do not add to quarterly totals because of rounding.
Comparable monthly current account data are not published.

IV-15
quarter were in net exports and private inventory accumulation.

The

fact that private consumption was quite weak by comparison, however,
may foreshadow considerably weaker domestic demand in 1980.

The

government sector is also not expected to be a stimulus to growth
next year given that in the recently proposed budget outline for FY
1980 real government expenditure will expand very slowly, if at all.
Inflation in wholesale prices continues to plague the economy.
Wholesale prices increased by another 1-1/2 percent in November -the eighth consecutive month of greater than 1 percent month-to-month
increases.

About half of recent increases in the WPI are attributable

to depreciation of the yen.

The CPI, which has lower weights for raw

materials and fuel, increased at a much slower rate.
Japan recently has been recording its largest monthly trade- and
current-account deficits of the decade.

With a $1.7 billion deficit

in the current account (and a $700 million trade deficit) in November,
the Japanese current-account deficit for all of 1979 is likely to
exceed $8 billion -- a remarkable turnabout from last year's $16-1/2
billion surplus.

The recent decline in Japan's nominal trade position,

due largely to rapid increases in the prices of oil and other imported
commodities, is obscuring a strong increase of export volume.

While

export volume had been flat through 1978 and early 1979, in the three
months ending in October it has advanced at over a 14 percent annual
rate.
Real GNP in Canada rose 5.2 percent (s.a.a.r.) in the third
quarter, after declining by 2.8 percent in the second.

A 5.3 percent

increase in real personal expenditures weighed heavily in the strong

IV-16

performance of GNP.

However, the strength of consumption, which

accounts for 60 percent of GNP, was in part due to the spending of
income tax refunds received in the second quarter.

Although personal

income was up by 8-1/2 percent, increases in personal income taxes
led to virtually no change in disposable income in the third quarter.
Real business fixed investment continued to be the strongest sector
of the economy in 1979.

Investment in plant and equipment

increased

by over 20 percent and non-residential construction increased by over
25 percent (s.a.a.r.).

A sharp increase in before-tax profits was an

important factor in these additions to capacity.
After submitting its first budget since the May 22 elections,
the government of Canadian Prime Minister Clark lost a vote of confidence ard resigned on December 14.

Proposed increases of energy

and excise taxes played a role in the defeat of the Clark government.
A general election will be held on February 18.
The Italian economy rebounded strongly in September and October
after the mid-year weakness caused by widespread strike activity.
Industrial production in October was about 10 percent higher than
the July-August level (not annual rate).

GDP data for the third

quarter capture only part of the rebound, showing a 1 percent increase
over the previous quarter.

Business survey data point to a continued

moderate strengthening of activity for the near-term.
Consumer price data for November indicate that inflation decelerated somewhat after the dramatic upsurge in September and October
when prices rose a total of 5 percent.

The sharp acceleration was led

by one-time increases in energy-product prices (which are administra-

IV-17

tively set) and taxes, and also by the quarterly rent adjustment in
October.
The trade balance also appears partly to have reflected the
effects of the mid-year strikes.

The customs deficit (s.a., imports

c.i.f.) fell from about $2 billion in May-July, which was the period
of strikes, to $300 million in August-October.
The French economy has strengthened in the third quarter after
a weak performance in the first half of the year.

Industrial produc-

tion rose dramatically during the third quarter, while real GDP
increased by about 7 percent (s.a.a.r.).

However, the sharp fall

of industrial production in October may portend weaker fourth quarter
activity.
Inflation, as measured by the rate of change of the consumer
price index, accelerated during the first eleven months of last year;
in November the CPI was 11-1/2 percent above its year-earlier level.
Throughout the first eleven months of last year, wholesale prices
rose somewhat more rapidly than consumer prices, and in November they
were about 14 percent above their level of November 1978.
Growth of real GNP in Germany has slowed in the third quarter
and there are some signs that the slowdown continued in the fourth
quarter.

Industrial production in the three months to October was

0.8 percent below its level during the preceeding three-month period.
Housing orders have continued to decline, retail sales have been
falling for several months, the two-year automobile boom ended in
mid-year, and orders for investment goods are rising only slowly.
However, employment (s.a.) has been rising during the year and the

IV-18

unemployment rate, at 3.6 percent, is currently at its lowest level
since 1974.
In December the consumer price index was 5.7 percent over its
year-earlier level.

The monthly rate, after having dropped to 0.1

percent in August and September, accelerated again to 0.4 percent in
November and December.

Wholesale prices in November were 9.6 percent

above their year-ago level.

Differences in the weights accorded to

fuels and raw materials account for the different rates of increase
of these two indexes.
Germany's current account (n.s.a.) has swung from a $7.3 billion
surplus for the first eleven months of 1978 to a $4.7 billion deficit
in the corresponding period of last year; $6.8 billion of this $12.0
billion swing is accounted for by the reduction in the trade surplus.
The major factor in this swing has been worsened terms of trade rather
than adjustment in trade volume.
In the United Kingdom real GDP in the third quarter of 1979 fell
at an annual rate of about 8-1/4 percent, according to early estimates
of the output-based measure of GDP.

This decline primarily resulted

from widespread strikes in the manufacturing sector.

Recent data --

the October rise in industrial production, substantial increases in
the volume (s.a.) of retail sales in October and November, and increased
vehicle production (s.a.) in these two months -- suggest that real GDP
probably rebounded in the final quarter of 1979.
Wholesale and retail prices have been rising since last summer
at roughly 1 percent per month.

Increases in wage settlements will

contribute to continued high inflation rates:

U.K. average earnings

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in October were nearly 16-3/4 percent higher than a year ago, sharply
higher than the 14-1/2 percent year-on-year increase in September.
The large rise in the index in October was mainly due to the engineering
industry wage settlement of roughly 20 percent.
There has been a sharp turnaround in the U.K. current account
from a $2 billion surplus in 1978 to a nearly $5 billion deficit
through November of 1979.

Contributing to this turnaround has been

an increase in the trade deficit (due in part to exports lost because
of strikes) despite a growing contribution from North Sea oil.

In

addition, the surplus on the service account, which in 1977 and 1978
more than offset the trade deficit, has declined from $4.25 billion
in 1978 to $1.4 billion in the first three quarters of 1979.

Part

of this decline has been caused by an increase in interest, profits
and dividends due overseas for foreign participation in North Sea oil.
Preliminary data indicate that the strong expansion of economic
activity that characterized the first half of 1979 in Belgium and the
Netherlands has continued into the fourth quarter, although perhaps
at a slightly slower pace in the second half of the year.

Unemploy-

ment has remained approximately unchanged in the Netherlands from
January through September and has fallen slightly in Belgium during
the same period.

In the Netherlands, the rate of inflation as

measured by the consumer price index increased slightly in recent
months,and in November was about 4-1/2 percent above its year-earlier
level; in Belgium it has risen from an annual rate of 3.8 percent in
the first quarter to an annual rate of 5 percent during the fourth
quarter.

Because of the continued inflation and the exchange-rate

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constraint associated with participation in the EMS, both Belgium
and the Netherlands pursued tight monetary policy through the end
of 1979.