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Confidential (FR) Class II FOMC Part 1 July 9, 1975 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Summary and Outlook Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONFIDENTIAL (FR) July 9, 1975 SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System SUMMARY AND OUTLOOK I-1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. The beginnings of recovery are now evident in several key sectors of the economy. Although a substantial rate of inventory liquidation apparently kept the second quarter from showing over-all real growth, prospects for an upturn in the third quarter have strengthened. As yet, however, no major sector has displayed signs of unusual vigor, and we therefore still expect a comparatively moderate recovery over the next year. Industrial production seems to have stabilized in June and may have shown its first increase after 8 months of steady decline. Output of both durable and nondurable consumer goods apparently increased last month, but production of business equipment and materials continued to fall. Auto assemblies rose by 9 per cent, and the recent sales rise suggests that industry schedules for further expansion in auto production during the third quarter will be maintained. The continued increase in unit sales of domestic auto models during the last 10 days of June brought the total for the month to a 7.1 million annual rate, up from 6.2 million in May and 5.7 million in April. Sales of foreign modesl were at a 1.6 million annual rate in June, holding at about this rate since March. The level of auto sales remains comparatively low, but the recent improvement in domestic car sales was somewhat better than we had been projecting. I-2 Excluding autos, retail sales were about unchanged in June-judging by weekly data--following an unusually strong May rise. The figures for the second quarter as a whole, however, indicate a rise in real consumer purchases of goods, particularly for such "nonessential" categories as food away from home, furniture and appliances, and apparel. Sales in the GAF category of stores were up about 4-1/2 per cent in the second quarter, not at an annual rate. The outlook for consumer expenditures has continued to improve according to the Michigan survey taken in May. Consumers were much less pessimistic than in February and more thought it was a good time to purchase household durables, autos, and houses. The level of the index of consumer sentiment, however, is still quite depressed. The long-awaited upturn in residential construction activity now seems firmly underway. Private housing starts increased in May by 14 per cent to a 1.1 million unit annual rate. The rise occurred among both single and multifamily units and was widespread geographically. Residential building permits also rose in May-- by 9 per cent--to a level about a third above their low this past March. Further gains in activity from present low levels seem likely, given the improved supply of mortgage credit, the recent strong rise in sales and the associated reduction in unsold units, as well as the prospect of increased Federal support due to the revised housing bill. I-3 Business outlays for fixed capital in real terms are still declining and any appreciable recovery in this sector does not appear likely in the near term. Orders for nondefense capital goods rose by 1 per cent further in May following a strong April surge, but the level of these orders remains about a fifth below their mid-1974 high. Moreover, contracts for commercial and industrial buildings (square feet) fell sharply in May, retracing much of the large April gain. New orders for durable goods as a whole also rose by 1 per cent in May following a 9 per cent increase the preceding month. Further increases in these orders are likely in the months ahead as adjustments in inventories are completed in larger numbers of industries. In May, inventory liquidation was still in full swing in manufacturing. The book value of manufacturers' inventories declined by $17 billion annual rate, following a $12 billion drop in April. Both durable and nondurable stocks declined sharply; in nondurables, this development occurred despite a sizable earlier reduction in the inventory/shipments ratio in this sector. The May decline in materials stocks could well be associated with the large reduction of materials imports that month. The labor market appears to have stabilized in the past few months--with layoffs down and some recovery underway in hiring. As was well publicized, the decline in the unemployment rate in I-4 June represented problems of seasonal adjustment connected with handling the influx of younger workers into the labor market at the end of the school year; the unemployment rate remained about unchanged for adults. Total nonfarm payroll employment--and factory jobs-- were about unchanged in June. Both wages and prices have been rising at a moderate pace recently. The average hourly earnings index jumped in June, but the rate of increase has been moderating steadily over the past three quarters. In the second quarter, the index increased at a 6.6 per cent annual rate. Developments in wholesale prices also have been favorable, with the index down 0.1 per cent, seasonally adjusted, in June--as lower prices for farm products and foods more than offset a rise in industrials. The larger increase for industrials was due mainly to higher prices for petroleum and products. Consumer prices rose by 0.4 per cent in May, with a marked slowing evident among nonfood commodities and services. Outlook. The current staff GNP projection conforms in major outline to the projections shown in the preceding Greenbook. However, the projected growth of real GNP has been raised slightly to an average of about 5-3/4 per cent over the next six quarters. Projected price levels have also been raised somewhat, due to larger recent increases in prices of petroleum products than previously allowed for. I - 5 Our assumptions of future fiscal and energy developments remain virtually unchanged. The unified budget deficit is expected to be $69 billion in FY 1976, close to the Congressional figure. On the energy side, we still assume only a small further increase in crude oil prices, due to an October 1st OPEC increase of $1 per barrell in the price of crude. There is a real possibility of a gradual decontrol in the price of old oil, instead of the extension on controls that we have assumed. But at the moment the uncertainties in this area appear too great to incorporate a specific change in assumptions. On the monetary side, we assume a rate of growth in M1 averaging around 6-1/4 per cent over the projection period. Short- term interest rates are assumed to continue moving up--with the bill rate rising to 7-1/2 per cent by late this year and approaching 8-3/4 per cent in late 1976. The more rapid growth in real GP now expected in the second half of this year--about 6 per cent, annual rate--reflects in large measure a more vigorous rebound in inventories following the sharper-than-anticipated second quarter liquidation. In addition, the higher rate of auto sales recently is anticipated to carry over into early fall, partially in response to announced price increases for 1976 models. On the other hand, net exports are projected to weaken substantially, as imports rebound from their unusually low level in the second quarter. I-6 During 1976, the projected real growth rate of GNP stays in a narrow range of 5.5 to 5.8 per cent. While the upward thrust on GNP from inventory rebuilding and residential construction fades as the year progresses, growth is nevertheless fairly well maintained as business fixed investment strengthens in real terms. Reflecting in part the slightly higher projected level of economic activity, and in part recent labor market developments, the projected unemployment rate has been reduced by between 0.2 and 0.3 percentage points during the next six quarters. The rate is now expected to average 9.0 per cent in the third quarter of 1975 and to decline to 8.2 per cent by the fourth quarter of 1976. Price projections have been raised somewhat for the third quarter of 1975, but the rates of change thereafter remain unchanged from the previous projection. The greater third quarter increase-- which temporarily interrupts the steady moderation projected for price increases--is directly related to the recently-announced price hikes in gasoline and other petroleum products, which have been larger than we had expected. The increase in the gross private product fixed weighted price index is still expected to moderate during 1976, averaging about 4-1/2 per cent annual rate toward the end of next year. I- 7 STAFF GNP PROJECTIONS Changes in nominal GNP ($ billions) 6/11/75 7/9/75 1972 1973 1974 1975 1976 103.1 136.9 102.5 71.4 163.5 1974-I 1/ 14.8 II1/ 25.0 II III I/ I / 1975-1 1/ II III IV 32.5 14.6 -13.8 103.1 136.9 102.5 70.5 167.5 14.8 25.0 32.5 14.6 -14.3 Per cent change, annual rate Gross private product fixed weighted Real GNP 6/11/75 7/9/75 (per cent) 6/11/75 7/9/75 6.2 6.2 5.9 5.9 -2.1 -2.1 -4.0 -3.9 5.2 5.4 3.3 6.3 11.4 9.3 5.4 3.3 6,3 11.4 9.3 5.4 5.6 4.9 5.6 8.9 8.7 5.6 4.9 5.6 -7.0 -1.6 -1.9 -9.0 14.1 12.3 13.6 12.6 14.1 5.2 5.1 5.5 6.6 5.2 5.1 5.5 6.6 -11.3 -11.4 .0 .3 5.4 6.1 5.7 6.0 7.7 7.0 6.3 5.6 7.7 6.3 6.8 5.5 8.3 9.2 9.0 8.3 8.9 9.0 8.8 5.8 5.8 5.5 5.5 5.3 4.9 4.7 4.6 5.2 4.9 4.7 8.9 3.8 8.6 8.5 8.7 8.5 8.3 8.2 4.1 3.8 2.4 2.2 -7.0 -1.6 -1.9 -9.0 25.9 22.4 42.0 46.0 45.0 46.0 1976-1 II III IV 41.5 40.0 40,0 43.0 42.0 41.5 Change: 74-1 to 75-II 59.2 55.2 -5.6 -5.7 40.5 44.0 price index 6/11/75 7/9/75 Unemployment rate 5.6 5.4 5.4 5.3 10.2 12.3 13.8 12.6 4.6 10.1 9.2 8.4 8.5 74-IV to 75-IV 99.1 100.1 - .3 - .1 6.6 6.6 75-II to 76-11 168.5 175.5 5.5 5.9 5.5 5.6 - .4 - .4 75-IV to 76-IV 164,5 168.0 5.4 5.6 4.9 4.9 - .5 - .6 1/ Actual, July 9, CONFIDENTIAL - FR 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of dollars, with quarter figures at annual rates.) 1975 1976 I I IV Projected I 1416.6 1435.8 1104.2 1095.4 1439.0 1458.0 1120.1 1112.8 1485.0 1495.3 1150.4 1147.3 1531.0 1533.0 1176.9 1178.5 1573.0 1567.0 1203.0 1207.3 1614.5 1604.0 1232.4 1238.8 1655.0 1642.5 1263.3 1269.7 1699.0 1684.5 1294.0 1300.7 Personal consumption expenditures Durable goods Nondurable goods Services 913.2 124.9 398.8 934.3 127.8 408.0 398.5 964.1 132.3 422.3 409.5 988.9 136.6 431.6 420.7 1010.5 140.6 438.0 431.9 1033.1 144.3 445.7 443.1 1056.3 148.3 453.7 454.3 1079.9 152.3 462.1 465.5 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 163.1 35.3 146.9 -19.2 159.5 34.7 143.8 -19.0 -18.0 172.9 39.2 144.0 -10.3 187.6 43.6 146.0 -2.0 -3.0 202.8 47.6 149.2 6.0 6.0 216.2 52.5 153.2 10.5 10.5 225.9 55.7 157.7 12.5 12.5 235.3 57.1 163.7 14.5 14.5 -6.4 153.3 159.7 -6.7 158.5 165.2 Gross National Product Final purchases Private Excluding net exports 389.5 -17.8 8.8 IIIII -10.0 3.1 I I ." IV Net exports of goods and services 1/ Exports Imports 142.2 133.4 7.3 132.1 124,8 134.0 130.9 -1.6 138.1 139.7 -4.3 143.1 147.4 -6.4 147.9 154.3 Gov't. purchases of goods and services Federal Defense Other State and local 331.6 126.5 84.7 41.8 205.1 337.9 128.4 85.6 42.8 209.5 344.9 130.1 86.1 44.0 214.8 356.1 135.3 90.3 45.0 220.8 364.0 137.2 91.2 46.0 226.8 371.6 138.6 92.2 46.4 233.0 379.2 140.3 93.1 47.2 236.9 390.5 146.1 97.1 49.0 244.4 Gross national product in constant (1958) dollars GNP implicit deflator (1958=100) 780.0 181.6 780.1 184.5 791.8 187.6 803.4 190.6 814.8 193.0 826.4 195.4 837.4 197.6 848.7 200.2 1193.4 765.1 1015.5 75.9 7.5 1220.3 773.7 1079.3 119.1 11.0 1247.9 792.2 1073.1 82.8 7.7 1280.7 814.5 1098.0 82.6 7.5 Corporate profits & inventory val. adj. Corporate profits before tax 94.3 101.2 98.4 103.0 110.2 118.0 119.6 128.5 Federal government receipts and expenditures, (N.I.A. basis) Receipts 2/ Expenditures Surplus or deficit (-) 2/ 284.1 338.5 -54.4 248.0 355.4 -107.4 291.0 361.7 -70.7 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 1341.2 856.0 1145.0 84.6 7.4 1373.1 876.0 1169.9 85.8 7.3 1406.1 126.1 134.0 133.3 140.0 140.3 146.0 147.8 153.0 303.2 372.4 -69.2 317.8 379.4 -61.6 326.8 387.5 -60.7 336.9 395.4 -58.5 346.8 407.0 -60.2 1309.0 835.0 1118.4 80.9 7.2 899.3 1196.8 88.7 7.4 9.6 -37.0 -8.5 -10.1 -5.4 -5.7 -4.2 -7.0 State and local government surplus or deficit (-) (N I.A. basis) -1.6 -2.5 -2.1 -1.1 -1.0 -1.9 -3.2 -2.5 Total labor force (millions) Armed forces Civilian labor force" Unemployment rate (per cent) 94.0 2.2 91.8 8.3 94.7 2.2 92.5 8.9 95.2 2.2 92.9 9.0 95.4 2.2 93.1 8.8 95.8 2.2 93.4 8.7 96.2 2.2 93.8 8.5 96.5 2.2 94.2 8.3 96.9 2.2 94.6 8.2 Nonfarm payroll employment (millions) Manufacturing 76.8 18.4 76.4 18.1 76.8 18.2 77.2 18.3 77.6 18.5 78.1 18.7 78.6 19.0 79.1 19.2 High employment surplus or deficit (-) = Industrial production (1967 100) Capacity utilization, mfg. (per cent) Major materials (per cent) Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models Foreign models 1/ Net exports of g. & s. (Bal. of paymts) Exports Imports 111.6 68.2 70.2 109.4 66.3 70.3 .99 1.10 7.90 6.33 1.57 8.31 6.60 1.71 13.41/ 148.6.3/ 135.3 11.&/ 138.52/ 126.7 112.1 67.4 72.9 1.33 8.60 7.00 1.60 7.63/ 140.1/ 132.8 115.3 68.8 75.6 1.50 9.10 7.50 1.60 2.93! 144 .5/ 141.6 118.7 70.3 77.9 121.5 71.4 79.7 1.60 9.65 8.00 1.65 .2 149.5 149.3 1.65 9.69 8.00 1.69 -1.9 154.3 156.2 -- 124.2 72.4 81.0 1.70 9.98 8.25 1.73 -1.9 159.7 161.6 126.9 73.4 82.3 1.70 10.50 8.75 1.75 -2.2 164.9 167.1 2/ Federal government N.I.A receipts in 1975-II reflect the $8.1 billion rebate of 1974 individual income taxes and in 1975-111 and following quarters the $9.3 billion reduction in 1975 individual income taxes; this latter reduction, enacted only for 1975, is assumed to be continued in 1976. 3/ Includes $.3 billion, annual rate of shipments of military equipment and supplies to Israel which are not included in GNP exports. CONFIDENTIAL - FR July 9, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1975 I II Gross National Product Inventory changes Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local -14.3 -37.0 7.8 2.0 5.8 22.4 .2 22.2 15.9 -1.5 17.4 21.1 2.9 9.2 9.0 -. 6 -3.1 6.3 1.9 4.4 GNP in constant (1958) Final purchases Private -24.0 -1.3 -2.7 .1 .2 -1.0 dollars 22.7 14.9 6.9 8.0 17.4 4.2 7.1 6.0 -5.1 -4.3 ------------ 1976 III IV Projected I II 46.0 8.7 37.3 30.3 -4.2 34.5 29.8 4.5 14.3 11.0 4.5 .2 7.0 1.7 5.3 46.0 8.3 37.7 26.5 4.7 31.2 24.8 4.3 9.3 11.2 4.4 2.0 11.2 5.2 6.0 42.0 8.0 34.0 26.1 -2.7 28.8 21.6 4.0 6.4 11.2 4.0 3.2 7.9 1.9 6.2 41.5 4.5 37.0 29.4 -2.1 31.5 22.6 3.7 7.7 11.2 4.9 4.0 7.6 1.4 6.0 40.5 2.0 38.5 30.9 .0 30.9 23.2 4.0 8.0 11.2 3.2 4.5 7.6 1.7 5.9 44.0 2.0 42.0 30.7 -. 3 31.0 23.6 4.0 8.4 11.2 1.4 6.0 11.3 5.8 5.5 11.7 8.1 7.3 11.6 5.2 7.4 11.4 5.1 7.0 11.6 8.6 8.3 11.0 10.3 9.9 11.3 9.6 9.4 III IV 1/ In Per Cent Per Year-------------- Gross National Product Final purchases Private -3.9 6.6 6.5 6.3 13.4 10.6 13.0 10.5 11.4 9.2 11.0 9.8 10.4 10.0 11.1 10.6 5.6 5.9 11.3 9.5 9.2 10.1 10.4 10.1 Personal consumption expenditures Durable goods Nondurable goods Services 8.0 14.7 7.5 6.4 9.6 9.6 9.6 9.6 13.4 14.8 14.8 11.5 10.7 13.6 9.1 11.4 9.0 12.2 6.1 11.1 9.3 10.9 7.2 10.8 9.3 11.6 7.4 10.5 9.2 11.2 7.6 10.2 Gross private domestic investment Residential structures Business fixed investment -63.2 -41.7 -10.9 -8.5 -6.6 -8.2 38.1 62.9 .6 38.6 53.0 5.7 36.6 42.1 9.1 29.2 48.0 11.2 19.2 26.7 12.3 17.7 10.4 16.1 10.0 6.6 3.4 12.4 12.2 7.8 6.1 4.3 9.9 8.9 8.5 5.4 2.4 11.7 10.5 13.6 17.0 21.0 9.4 11.7 9.2 5.7 4.0 9.2 11.3 8.6 4.1 4.5 3.5 11.4 8.4 5.0 4.0 7.1 10.5 12.5 17.6 18.3 16.1 9.5 -11.4 -. 7 -1.7 8. 7.7 .0 .1 -. 6 6.4 6.3 6.1 4.2 4.6 6.9 6.8 5.8 4.3 5.1 4.9 4.9 5.5 5.1 6.0 4.7 4.7 2.2 -2.1 2.7 9.3 4.6 27.6 9.4 9.9 -2.3 10.9 11.7 9.6 9.1 10.5 7.6 10.2 10.4 9.9 9.9 9.7 9.0 Corporate profits before tax -64.9 7.3 72.3 40.6 18.3 19.1 18.3 20.6 Federal Government receipts and expenditures (N.I.A. basis) Receipts Expenditures -13.6 26.3 -41.9 21.5 89.6 7.3 17.9 12.4 20.7 7.7 11.8 8.8 12.9 8.4 12.3 12.3 Nonfarm payroll employment Manufacturing -7.7 -22.3 -1.8 -6.1 2.0 2.2 2.1 2.2 2.1 4.4 2.6 4.4 2.6 6.6 2.6 4.3 Industrial production Housing starts, private Sales new autos Domestic models Foreign models -28.4 -2.4 60.9 41.8 172.4 -7.5 52.4 -18.3 -15.4 -28.9 10.1 113.7 40.4 49.5 7.9 11.9 61.8 25.4 31.8 .0 12.3 29.4 26.5 29.5 13.1 9.8 13.1 1.7 .0 10.1 9.2 12.7 12.5 13.1 9.8 9.0 .0 22.5 ?5 C 4.7 Gov't purchases of goods & services Federal Defense Other State and local GNP in constant (1958) dollars Final purchases Private GNP implicit deflator 3/ Private GNP fixed weighted indexPersonal income Wage and salary disbursements Disposable income / 1/ Percentage rates are annual rates compounded quarterly. 2/ Excluding Federal pay increases rates of change are: 1976-1, 5.2 per cent; and 1976-IV, 4.6 per cent. 3/ Using expenditures in 1967 as weights. 6.0 2.7 4.6/ 6.5.5 5.8 2.5 4.42/ = 5.3 5.2 5.5 4.8 5.6, 5.34.6 10.0 11.1 9.5 1975-I, 8.3 per cent; 1975-IV, 5.5 per cent; CONFIDENTIAL - FR July 9, 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of dollars, with quarter figures at annual rates.) 1973 I II 1974 III IV I II III IV 1248.9 1238.9 969.9 970.7 1277.9 1267.2 993.9 993.4 1308.9 1297.0 1020.1 1013.4 1344.0 1315.1 1028.7 1019.4 1358.8 1341.9 1045.6 1034.3 1383.8 1370.3 1065.9 1067.4 1416.3 1407.6 1095.3 1098.4 1430.9 1413.1 1089.3 1087.4 Personal consumption expenditures Durable goods Nondurable goods Services 781.7 132.4 323.3 325.9 799.0 823.9 332.7 334.2 816.3 132.4 343.8 340.1 840.6 123.9 364.4 352.4 869.1 129.5 375.8 363.8 901.3 136.1 389.0 376.2 895.8 120.7 391.7 383.5 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 199.0 58.5 130.5 10.0 6.5 205.1 58.7 135.6 209.0 58.1 139.0 11.8 7.7 7.4 24.0 210.5 48.4 145.2 16.9 13.1 211.8 48.8 149.4 13.5 10.4 205.8 46.2 10.7 224.5 53.6 141.9 28.9 209.4 40.4 151.2 17.8 17.5 .5 95.4 94.9 6.7 103.7 96.9 9.3 113.6 104.3 11.3 131.2 119.9 -1.5 138.5 140.0 -3.1 143.6 146.7 1.9 147.5 145.7 323.8 124.5 804.0 178.0 Gross National Product Final purchases Private Excluding net exports Net exports of goods and services Exports Imports 1/ -. 8 88.8 89.5 132.1 124.3 352.1 347.4 150.9 8.7 6.6 Gov't. purchases of goods and services Federal Defense Other State & local 269.0 106.4 75.0 31.4 162.6 273.3 106.2 74.0 32.2 167.1 276.9 105.3 73.3 32.0 171.6 286.4 108.4 75.3 33.1 177.9 296.3 111.5 75.8 35.7 184.8 304.4 114.3 37.7 190.1 312.3 117.2 78.4 38.8 195.1 Gross national product in corstant (1958) dollars GNP implicit deflator (1958 = 100) 832.8 150.0 837.4 152.6 840.8 155.7 845.7 158.9 830.5 163.6 827.1 167.3 823.1 172.1 1068.0 1039.2 683.8 698.2 892.1 913.9 69.6 73.2 7.8 8.0 1099.3 717.0 939.4 89.3 1134.6 745.2 1168.2 763.0 993.1 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 1013.6 667.6 869.5 65.3 7.5 9.5 1112.5 727.6 950.6 84.4 8.9 76.6 966.5 71.5 7.4 65.5 6.6 84.0 40.6 199.3 1186.9 769.2 1008.8 86.5 8.6 Corporate profits & inventory val. adj. Corporate profits before tax 103.9 120.4 105.0 124.9 105.2 122.7 106.4 122.7 107.7 135.4 105.6 139.0 105.8 157.0 103.4 131.5 Federal government receipts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) 249.1 260.2 -11.2 255.0 262.4 -7.4 261.8 263.4 -1.7 268.3 270.6 -2.3 278.1 281.0 -2.8 288.6 291.6 -3.0 302.8 304.7 -1.9 294.7 319.3 -24.5 -8.5 -3.4 4.6 4.8 14.0 19.6 24.7 17.8 State and local government surplus or deficit (-), (N.I.A. basis) 13.2 10.4 8.4 4.6 3.2 2.0 2.1 -.1 Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) 90.0 2.4 87.6 5.0 90.8 2.3 88.5 4.9 91.3 2.3 89.0 4.8 92.1 2.3 89.8 4.8 92.7 2.3 90.5 5.2 92.9 2.2 90.6 5.1 93.6 2.2 91.4 5.5 94.0 2.2 91.8 6.6 Nonfarm payroll employment (millions) Manufacturing 75.8 19.8 76.5 20.0 77.1 20.1 77.8 20.3 78.0 20.2 78.3 20.2 78.7 20.1 78.3 19.6 124.9 80.5 90.2 125.5 80.1 90.2 High employment surplus or deficit (-) Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) 123.1 82.8 93.0 2/ 126.7 83.3 93.5 2.17 12.03 10.17 1.85 .5 95.4 2.01 11.33 9.66 1.67 6.6 103.7 97.1 127.0 82.6 92.3 1.62 10.15 8.51 1.61 9.04 7.49 1.55 125.4 79.4 88.5 121.3 75.7 79.1 1.53 1.21 1.00 9.17 10.07 7.38 7.92 8.52 6.05 1.55 1.25 1.33 Net exports of g.& s. (Bal. of Paymts.) -. 7 10.92/ 11.21/ -. 72/ 3.32/ 2 Exports 88,8 116.0 140. 2 7 146.8 132.3 151. Imports 89.5 94.9 105.1 121.1 140.9 148.1 147.8 Includes shipments of military equipment and supplies to Israel which are not included in GN? exports; amounts in billions of dollars at annual rates are 1973-IV, $2.4; 197&-I, $.3; 1974-11, $.4, 1974-111, $.3; and 1974-IV, $.3. Housing starts, private (millions, A.R.) 2.39 12.18 Sales new autos (millions, A.R.) Domestic models 10.26 Foreign models 1.92 I/ 124.8 83.3 93.4 CONFIDENTIAL - FR July 9, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1973 I II 1974 III -------------------Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 44.2 -1.0 45.2 38.8 4.5 34.3 24.5 8.1 12.4 3.9 1.8 8.0 6.4 1.2 5.2 29.0 .7 28.3 24.0 1.3 22.7 17.3 GNP in constant (1958) dollars Final purchases Private 18.6 20.2 19.1 4.6 4.1 4.3 IV I II III IV Billions of Dollars----------------- -. 3 9.4 8.3 .2 5.1 4.3 -. 2 4.5 3.4 3.1 3.3 35.1 17.1 18.1 8.6 2.6 6.0 7.6 -8.1 8.3 7.3 -4.5 2.9 9.5 3.1 6.3 14.8 -12.0 26.8 16.9 2.0 14.9 16.7 - .4 12.3 5.0 -5.2 3.3 9.9 3.1 6.9 25.0 -3.4 28.4 20.3 -12.8 33.1 28.5 5.6 11.4 11.4 .4 4.3 8.1 2.8 5.3 4.9 -7.0 -9.0 -15.2 -5.8 -6.1 -3.4 -1.0 - .8 14.6 9.1 5.5 -6.0 5.0 -11.0 -5.5 -15.4 2.7 7.3 -5.8 .3 11.5 7.3 4.2 -4.0 - .8 - .9 -19.1 -25.0 -25.4 In Per Cent Per YEear 1----------- -------------------Gross National Product Final purchases Private 15.5 9.6 10.1 11.2 4.5 16.0 17.7 9.5 10.3 9.7 11.0 5.7 3.4 8.4 6.7 7.6 8.7 8.0 9.7 11.3 11.5 4.2 1.6 -2.2 Personal consumption expenditures Durable goods Nondurable goods Services 13.6 28.7 16.9 4.9 9.2 - .9 12.1 10.6 8.9 .9 14.0 7.3 3.8 -22.3 10.0 8.9 8.4 -1.3 14.7 5.9 14.3 19.3 13.1 13.4 15.7 22.0 14.8 14.3 -2.4 -38.1 2.8 8.0 Gross private domestic investment Residential structures Business fixed investment 19.8 13.3 28.8 12.8 1.4 16.6 7.8 -4.0 10.4 33.1 -27.6 8.6 -22.7 -33.5 9.6 2.5 3.3 12.1 -10.9 -19.7 4.1 7.2 -41.5 .8 Gov't. purchases of goods and services Federal Defense Other State and local 10.1 4.6 1.6 12.3 13.9 14.4 12.3 11.4 14.5 15.5 14.6 11.9 2.7 35.3 16.4 15.6 27.3 31.8 19.9 8.9 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator Private GNP fixed weighted index 2! 9.5 10.4 12.0 5.5 7.4 2.4 -3.3 -5.1 8.6 9,1 -7.0 -2.8 -3.5 12.3 14.1 -9.0 -11.7 -14.3 14.4 12.6 Personal income Wage and salary disbursements Disposable income 12.1 13.0 15.8 10.5 10.1 10.8 11.6 8.7 10.1 12.2 11.7 11.6 4.9 6.0 4.9 8.2 10.0 6.9 12.4 9.9 11.5 Corporate profits before tax 53.3 15.8 -6.9 .0 48.3 11.1 62.8 -50.8 Federal government receipts and expenditures (N.I.A. basis) Receipts Expenditures ?5.0 -1.5 9.8 3.4 11.1 1.5 10.3 11.4 15.4 16.3 16.0 16.0 21.2 19.2 -10.3 20.6 5.0 6.3 3.9 4.4 3.0 2.1 3.8 3.7 1.0 -2.4 1.6 - .3 1.7 - .6 -1.7 -10.4 1.0 -58.3 -35.5 -39.8 -5.9 -6.5 -2.0 -37.1 -40.0 -20.0 1.9 -19.1 5.9 25.1 -57.8 - .3 -12.5 -53.0 -71.2 -74.6 -46.2 Nonfarm payroll employment Manufacturing Industrial production 10.0 5.6 Housing starts, private -5.5 -32.7 Sales new autos 18.3 -5.0 Domestic models 15.4 -3.5 Foreign models 35.4 -12.9 1/ Percentage rates are annual rates compounded quarterly. 2/ Using expenditures in 1967 as weights. 6.2 -25.3 -71.3 -18.6 -35.0 . . -60.7 45.5 33.8 138.3 6.6 3.3 6.5 CONFIDENTIAL - FR July 9, 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of dollars) 1969 1970 1971 1972 1973 1974 1975 1976 Projected Gross National Product Final purchases Private Excluding net exports 930.3 977.1 1054.9 1158.0 1294.9 1397.4 1467.9 1635.4 922.5 712.5 710.6 972.6 753.1 749.5 1048.6 814.4 814.6 1149.5 893.8 899.8 1279.6 1003.2 999.3 1383.2 1074.0 1071.9 1480.5 1137.9 1133.5 1624.5 1248.2 1254.1 Personal consumption expenditures Durable goods Nondurable goods Services 579.5 90.8 245.9 242.7 617.6 91.3 263.8 262.6 667.1 103.9 278.4 284.8 729.0 118.4 299.7 310.9 805.2 130.3 338.0 336.9 876.7 127.5 380.2 369.0 950.1 130.4 415.2 404.6 1045.0 146.4 449.9 448.7 Gross private domestic investment Residential Construction Business fixed investment Change in business inventories Nonfarm 139.0 32.6 98.5 7.8 7.7 136.3 31.2 100.6 4.5 4.3 153.7 42.8 104.6 6.3 4.9 179.3 54.0 116.8 8.5 7.8 209.4 57.2 136.8 15.4 11.4 209.4 46.0 149.2 14.2 11.9 170.8 38.2 145.2 -12.6 -12.2 220.1 53.2 156.0 10.9 10.9 - 2.1 -6.0 150.7 156.7 1.9 3.6 55.5 53.6 62.9 59.3 65.4 65.6 72.4 78.4 3.9 100.4 96.4 140.2 138.1 4.4 136.6 132.2 Gov't. purchases of goods and services Federal Defense Other State & local 210.0 98.8 78.4 20.4 111.2 219.5 96.2 74.6 21.6 123.3 234.2 97.6 71.2 26.5 136.6 255.7 104.9 74.8 30.1 150.8 276.4 106.6 74.4 32.2 169.8 309.2 116.9 78.7 38.2 192.3 342.6 130.1 86.7 43.4 212.6 376.3 140.6 93.4 47.2 735.8 Gross national product in constant (1958) dollars GNP implicit deflator (1958=100) 725.6 128.2 722.5 135.4 746.3 141.4 792.5 146.1 839.2 154.3 821.2 170.2 788.8 186.1 831.8 196.6 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 750.9 509.7 634.4 38.2 6.0 808.3 944.9 626.8 1055.0 691.7 691.7 56.2 8.1 864.0 573.0 746.4 60.5 8.1 802.5 903.7 52.6 6.6 74.4 1150.5 751.2 979.7 77.0 1235.6 786.4 1066.5 90.1 8.4 1357.4 851.6 1157.5 85.0 7.3 69.2 74.0 78.7 83.6 92.2 99.2 105.1 122.7 105.6 140.7 105.6 112.7 136.9 143.3 198.5 220.3 -21.9 227.2 244.7 -17.5 258.5 264.2 -5.6 291.1 299.1 -8.1 281.6 357.0 -75.4 332.1 392.3 -60.3 Net exports of goods and services 1/ Exports Imports Corporate profits & inventory val. adj. Corporate profits before tax 79.8 84.9 542.0 - .2 6.0 8.2 7.9 kederal government Leceapts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) 197.3 189.2 8.1 192.0 203.9 -11.9 8.8 3.7 -4.7 -6.7 - .7 19.1 -11.5 .7 1.8 3.4 12.3 9.2 1.8 -1.8 -2.2 Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) 84.2 3.5 80.7 3.5 85.9 3.2 82.7 4.9 86.9 2.8 84.1 5.9 89.0 2.4 86.5 5.6 91.0 2.3 88.7 4.9 93.2 2.2 91.0 5.6 94.8 2.2 92.6 8.8 96.4 2.2 94.0 8.5 Nonfarm payroll employment (millions) Manufacturing 70.4 20.2 70.9 19.3 71.2 18.6 73.7 19.1 76.8 20.1 78.3 20.0 76.8 18.3 78.4 18.9 125.6 83.0 93.0 124.7 78.9 87.0 112.1 67.7 72.0 122.8 71.9 2.05 11.44 9.67 1.77 1.34 8.87 7.45 1.42 33 1.23 8.48 6.86 1.62 8.93 1.66 9.96 High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models Foreign models 1/ 2/ 110.7 86.5 90.0 1.47 9.57 8.46 1.11 Net exports of g. & s. (Bal. of Paymts.) 1.3 55.0 Exports 53.6 Imports 106.7 78.3 86.2 1.43 8.40 7.12 1.28 2.9 62.3 59.4 106.8 75.0 85.3 2.05 10.24 8.68 1.56 - .2 65.4 65.6 115.2 78.6 89.6 2.36 10.93 9.32 1.61 -6.0 72.4 78.4 4.4 2/ 101.0 271 +2.62/ 1 39.4 96.6 143.0 134.1 Includes shipments of military equipment and supplies to Israel which are not included in GNP 1973, $.6; 1974, $.325; and 1975, $.150. exports; amounts in billions of dollars are: -5.6 80.2 8.25 1.71 -1.45 157.1 158.6 CONFIDENTIAL - FR July 9, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1969 1970 1971 1972 1973 1974 Projected 1975 1976 -------------- Billions of Dollars--------------------- Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 66.1 .7 65.4 55.0 46.8 -3.3 50.1 40.6 77.8 1.8 103.1 2.2 136.9 6.9 102.5 - 1.2 70.5 -26.8 76.0 100.9 130.1 103.6 97.3 61.3 79.4 109.4 70.8 63.9 - .6 1.7 -3.8 -5.8 9.9 - 1.8 55.6 43.3 38.9 38.1 65.1 49.6 85.2 61.9 99.5 76.2 72.6 71.5 61.6 73.4 6.8 .5 12.6 14.5 11.9 - 2.8 2.9 14.6 21.3 38.3 42.2 35.0 10.4 12.1 22.2 11.6 4.0 14.7 1.4 13.3 26.1 11.2 12.2 21.5 7.3 14.2 26.0 3.2 20.0 20.7 1.7 19.0 32.1 -11.2 12.4 32.8 10.3 22.5 35.6 -7.8 -4.0 33.4 13.2 20.3 34.7 44.1 15.0 10.8 33.7 10.5 23.2 GNP in constant (1958) dollars Final purchases Private 19.0 18.7 -3.1 - .4 23.8 -22.5 46.2 -44.4 46.7 43.0 -18.0 -15.9 -32.4 -15.2 43.0 27.1 20.6 6.2 18.5 46.1 45.2 -17.5 -17.7 29.5 15.1 21.4 2.5 9.7 10.4 .0 17.9 19.9 -1.4 2.1 9.5 -2.6 -------------- 94.9 16.0 Per Cent per Year---------- ------------ Gross National Product Final purchases Private 7.6 7.6 8.4 5.0 5.4 5.7 8.0 7.8 8.1 9.8 9.6 9.7 11.8 11.3 12.2 7.9 8.1 7.1 Personal consumption expenditures Durable goods Nondurable goods Services 8.1 8.1 6.5 9.7 6.6 .6 7.3 8.2 8.0 13.8 5.5 8.5 9.3 14.0 7.7 9.2 10.5 10.1 12.8 8.4 Gross private domestic investment Residential structures Business fixed investment 10.3 8.3 10.9 -1.9 -4.3 2.1 12.8 37.2 4.0 16.7 26.2 11.7 Gov't purchases of goods & services Federal Defense Other State and local 5.2 .0 .1 - .5 10.3 4.5 -2.6 -4.8 5.9 10.9 6.7 1.5 -4.6 22.7 10.8 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator Private GNP fixed weighted index- 2.7 2.7 3.7 4.8 4.7 - .4 - .1 1.1 5.5 4.8 Personal income Wage and salary disbursements Disposable income 9.0 9.6 7.3 7.6 6.3 9.0 Corporate profits before tax 2.3 167.5 23.5 144.0 110.3 -10.4 120.6 5.0 7.0 5.9 11.4 9.7 9.7 8.9 - 2.1 12.5 9.5 8.4 2.3 9.2 9.6 10.0 12.3 8.4 16.8 5.9 17.1 .0 -19.6 9.1 -18.4 -17.0 -2.7 28.9 39.3 7.4 9.2 7.5 5.1 13.6 10.4 8.1 1.6 - .5 7.0 12.6 11.9 9.7 5.8 18.6 13.3 10.8 11.3 10.2 13.6 10.6 9.8 8.1 7.7 8.8 10.9 3.3 3.1 3.9 4.6 4.3 6.2 6.0 6.7 3.4 3.3 5.9 5.5 6.5 5.6 6.3 - 2.1 - 1.9 - 2.6 10.3 11.4 -3.9 -1.9 -2.7 9.3 9.3 5.4 3.4 4.6 5.6 6.9 5.8 7.9 9.4 9.3 7.5 11.7 10.4 12.6 9.1 8.6 8.4 7.4 4.7 8.9 9.9 8.3 8.5 10.9 5.4 -3.1 -12.8 13.0 18.7 23.7 14.7 12.7 4.2 -2.7 7.8 3.4 8.0 14.5 11.1 13.8 8.0 12.6 13.2 -3.3 19.4 17.9 9.9 3.7 2.0 .7 -4.1 .4 -4.0 3.5 2.8 4.2 5.0 2.0 -. 2 -1.9 -8.5 2.1 3.2 4.7 -2.7 - .6 -1.8 9.0 -3.6 -2.3 -12.3 -15.9 15.5 .1 43.2 21.9 21.9 21.8 7.9 14.9 6.7 7.4 3.3 9.0 -13.2 4.7 3.7 9.8 -. 7 -34.6 -22.5 -23.0 -20.1 -10.1 -8.2 -4.4 -7.9 14.1 9.5 35.0 17.5 20.3 5.6 -19.9 27.2 Federal Government receipts and expenditures (N.I.A. basis) Receipts Expenditures Nonfarm payroll employment Manufacturing Industrial production Housing starts, private Sales new autos Domestic models Foreign models 1/ Using expenditures in 1967 as weights. I - 14 D0MESTIC FINANCIAL SITUATION Summary. Following the last Committee meeting, short-term market interest rates rose 75 to 130 basis points, paralleling similar increases in the Federal funds rate. During a period of record offerings of corporate bonds, the indications of a more restrictive monetary policy stance also contributed to increases in corporate bond yields of 30 to 60 basis points, and new offerings met increasing investor resistance even at these higher yields. bond yields fluctuated in cent, only a little a narrow range, While tax-exempt they remained near 7 per below the record highs reached late last year. Concerns regarding the quality of many new issues have tended to affect the entire municipal bond market, and a spillover from the size and yield of the New York City Municipal Assistance Corporation offering Home mortgage rates, affected corporate bond yields as well. on the other hand, supported by record inflows to thrift institutions and a late June step-up in FNMA activity, were virtually unchanged in both the primary and secondary markets. Tax rebates and Social Security supplements probably played a significant role in the rapid pace of deposit inflows to depositary institutions in June, with increases in passbook savings particularly strong at all types of such institutions. large Treasury disbursements ceased, In late June, after the inflows to the nonbank thrifts fell off sharply, but, for the month as a whole, these institutions apparently continued a high rate of new commitment activity and I - 15 residential mortgage acquisitions and still their liquid assets. added large amounts to Repayment of FHLB advances by S&L's slowed in June to less than $350 million, apparently in part because of fears of slower net savings inflows late in the year. market interest rates rose, At the same time, as there were increased demands for FNMA forward commitments to purchase home mortgages by mortgage companies and other originators. At commercial banks, loan demands remained weak, with total outstanding loans declining for the fifth consecutive month. Business loans were particularly weak as corporations expanded their already large volume of capital market financing. In May and June, however, banks stepped up their rate of purchase of tax-exempt securities, the first significant acquisitions since late 1974. Meanwhile banks have continued to purchase large amounts of Treasury issues. In the first banks purchased an amount equal to almost 60 per half of the year, cent of all net new Treasury issues (seasonally adjusted), shows. [A]t the same time, Treasury issues, as Table 1 households have been large liquidators of shifting to interest-bearing deposits at banks and thrift institutions and high yielding corporate and State and local government bonds. Outlook. In July and August, raise $13-15 billion of new cash, maturing issues in ugust. the Treasury may have to as well as refund $4.6 billion of Business corporations and State and local governments, taken together, are projected to be coming to capital I - 16 Table 1 ESTIMATED ACQUISITIONS OF U.S. GOVERNMENT AND AGENCY SECURITIES BY SECTOR SEASONALLY ADJUSTED ANNUAL RATES FLOW OF FUNDS BASIS FIRST HALF OF 1975 Billions of dollars TOTAL ISSUES 1/ Per cent 89.6 100.0 52.9 29.2 14.4 9.9 8.9 7.1 4.2 -36.9 59.0 32.6 16.1 11.0 9.9 7.9 Net acquisitions Commercial banks Private nonbank financial institutions Foreign Sponsored agencies Federal Reserve Corporate business State and local Governments Households 1/ 4.7 -41.1 Excludes U.S. Government lending to sponsored agencies that is included in Table 2, line 3. I - 17 markets for only a little less than in the spring and early summer, and foreign demands on capital markets are expected to be somewhat On the other hand, larger. consumer and short-term business credit demands seem likely to remain comparatively weak. The over-all pattern of credit demands is not significantly different from recent months and--barring any significant changes in supply--it thus appears that aggregate credit demands will not place upward pressure on interest rates in the near-term. Indeed, staff projections for credit demands in the second half of 1975, suggest only modest changes in shown in Table 2, size and composition of credit demands relative to the first All levels of government (line 1) of funds, half. the single largest demanders with the Treasury and sponsored agencies requiring somewhat less than in more. are still the the first half and States and local governments somewhat Business credit demands (line 6) are expected to remain modest with short-term credit flows still declining as inventories are liquidated, cash flow increases, large. and capital market financing remains Residential mortgages borrowing (line 10) is expand more rapidly chan in the first high volume of loan commitments is expected to half of the year as the current taken down. Although aggregate credit demands are not expected to be very much different in either the near term or in the second half relative to the first half, the projected recovery in nominal GNP implies a sizable increase in transactions demand for money. Assuming I - 18 Table 2 FUNDS RAISED IN CREDIT MARKETS Seasonally adjusted annual rates Flow-of-funds basis 1974-75 ($ billions) 1. 2. 3. 4. ALL GOVERNMENTS -- TOTAL U.S. Government 1/ Sponsored agencies 2/ State and local 5. 6. 7. 8. 9. 10. 11. PRIVATE DOMESTIC NONFINANCIAL & NON-GOV'T Business Short-term 3/ Long-term 4/ Consumer credit Residential mortgages Other 12. FOREIGN 13. CREDIT & EQUITY BORROWING OF PRIVATE FINANCIAL 5/ INSTITUTIONS 14. 1/ 2/ 3/ 4/ 5/ TOTAL FUNDS RAISED IN CREDIT MARKETS 1975 H2 Proj. 1975 H1 1974 H2 73.0 -1.0 24.0 86.2 4.6 17.1 81.0 71.4 125.6 38.3 -9.9 48.2 -5.4 35.4 3.1 79.3 42.4 36.9 6.6 35.7 4.0 96.0 107.9 63.0 18.9 27.4 16.7 37.0 -4.0 40.0 -1.0 43.0 2.0 -- 3.0 8.1 -8.9 3.0 207.5 170.3 183.0 10.9 Direct marketable and nonmarketable debt, savings bonds, and issues by on-budget and off-budget agencies. FNMA, FICB, Bank for Coops, Land Banks, and GNMA Guaranteed Mortgage backed securities. Business bank loans and open market paper. Bonds, equities, and non-residential mortgages. Includes FHLB advances to savings and loan associations as follows: 1974 H2: $6.5 billion 1975 H1: -$11.6 billion 1975 H2: -$6.0 billion. I - 19 Table 3 FUNDS ADVANCED IN CREDIT MARKET Seasonally adjusted annual rates Flow of funds basis 1974-75 ($ billions) 1975 H1 1974 H2 PRIVATE FINANCIAL INSTITUTIONS Domestic commercial banks and affiliates Thrift institutions 1/ 3. 4. Insurance and pension funds 2/ 5. All other 3 6. U.S. GOVERNMENT 7. Direct 4/ 8. Sponsored credit agencies 5/ Federal Reserve 9. 133.0 129.3 113.1 1. 2. 1975 H2 Proj. 41.3 19.9 34.9 52.3 52.0 37.0 44.2 7.7 42.0 .1 42.0 2.0 20.0 30.7 46.4 8.0 1.0 11.0 14.5 7.2 9.0 12.5 27.6 6.2 10. HOUSEHOLDS 29.5 -21.2 -8.0 11. ALL OTHER 6/ 18.6 31.5 38.0 12. TOTAL FUNDS ADVANCED IN 207.5 170.3 183.0 CREDIT MARKETS Savings and loan associations, mutual savings banks, and credit unions. Life and other insurance companies, private and public pension funds. Finance companies, REIT's, open-end investment companies, and securities brokers and dealers. 4/ Lending by on-budget and off-budget agencies. 5/ FNMA, FHLB, FICB, Land Banks, Banks for Coops. Includes mortgage pools GNMA guaranteed securities. 6/ Businesses, state and local governments, and rest of world. 1/ 2/ 3/ I - 20 bank reserves are supplied at a pace consistent with M1 growth in 5--7-1/2 per cent range, it rates will rise later in the year. a appears likely that short-term interest Asa result, inflows to thrift institutions (line 3 of Table 3)--no longer buoyed by tax refunds and rebates--would be expected to slow appreciably. In the staff pro- jections, therefore, by the fourth quarter the thrift institutions rate of inflow drops to a rate just equal to mortgage takedowns and liquid asset holdings of these institutions are no longer growing. This projection implies chat an even more cautious lending attitude is likely to develop Banks, too, among thrift institutions later this year. may be expected to become somewhat more restrictive in their loan policies as their costs of funds rise. I - 21 INTERNATIONAL DEVELOPMENTS Summary. The international accounts of the United States have strengthened recently, evidenced by a sizable and sustained trade surplus beginning in February and, more recently, by a considerable rise of the dollar in foreign exchange markets. Much of the gain in the trade balance has resulted from the earlier and steeper cyclical decline in economic activity in the United States than in other industrial countries. The 20 per cent depreciation of the dollar, on a weighted average basis, since 1970 also continues to affect the level of exports and imports. Of more significance for recent changes in the dollar exchange rate, however, has been the relative rise of interest rates on dollar assets in the past month. On a weighted average basis, the dollar advanced by about 2-1/4 per cent in the last two weeks, after having held roughly steady for about three months. Declines in economic activity everywhere have sharply reduced the physical volume of world trade. U.S. exports in volume terms were about 3 per cent lower in the January-May period than in the last half of 1974, while import volumes were down about 16 per cent. Though only partial data are available, there appears to have been a steep drop in trade volumes for all OECD countries combined, clearly the deepest contraction of world trade since World War II. I - 22 A large part of the reduction in U.S. exports in volume, and even more in value, is accounted for by the decline in agricultural exports since early in the year, reflecting the generally improved outlook for world food supplies. The most striking element in the U.S. trade picture, however, has been the extent of the decline in non-fuel imports after January. This sharp drop, from an annual rate of over $80 billion through January to about $65 billion in April-May, is largely attributable to the massive liquidation of inventories in the United States -- with import reductions showing up largely in industrial supplies. On the export side, also, a large portion of the decline in shipments reflects a drop in industrial supplies, related to some inventory contraction abroad. As a result of these developments, the trade balance in April-May registered a surplus at an annual rate of $8.4 billion, compared to $7.4 billion in the first quarter. Net outflows of private capital (changes in net foreign assets of banks and transactions in securities) rose sharply in May; there had been a small net inflow in April. In May net out- flows through banks were about $2.8 billion, as claims on foreigners rose by $2-1/2 billion and liabilities -- principally to foreign banks -- were reduced slightly. Weekly data for June suggest that liabilities to foreign banks may have been reduced further, but rising interest rates in the United States may have slowed down the rate of lending to foreigners. I - 23 There has been a considerable rise this year both in U.S. purchases of new foreign bonds offered in the U.S. market, and in foreign net purchases of U.S. corporate stocks, with a small net inflow on balance in these accounts in April and May. A large part, perhaps half, of the foreign purchases of U.S. corporate stocks has been by oil-producing countries, allowing for some indirect purchases recorded for other countries. Sales of foreign bonds in the United States were at a record rate in the first quarter, when they totaled $2.1 billion, but they slowed down to a quarterly rate of about $1-1/4 billion in the second quarter. There are indications that the volume of foreign bonds sold here will remain high by past standards, but at the same time U.S. corporations may again find it advantageous to sell their bonds in offshore markets after having done little in this market since the direct investment controls were removed. U.S. liquid liabilities to foreign official accounts were increased by about $700 million in May -- about evenly divided between OPEC and other countries. Through May liquid U.S. assets of OPEC countries had increased by about $1½ billion, plus about $1/2 billion of recorded investment in U.S. corporate stocks. This rate of inflow is much lower than in the last half of 1974, as is the flow into London, but it is not yet clear whether the change reflects diversification into other assets or a sharp decline in the OPEC surplus. Partial data for June continue to show a diminished OPEC flow into U.S. assets. I - 24 Outlook. The prospects for an upturn in economic activity abroad remain cloudy, both as to timing and vigor. other major OECD economies, probably begun to recover, Japan and Germany, but in Of the two the former has Germany there has as yet been no indication of an upturn and the authorities will wait until August to review the situation. Even when convincing upturns come in these countries, and the smaller economies that will be pulled along, the margins of unused resources will be large for some considerable time. The smaller OECD countries, and the developing countries that do not produce oil, must be feeling severely the contraction of major countries' imports, and will need to hold down their own imports, adding to the difficulties of stimulating an economic recovery. In the shorter run, the likelihood that the U.S. economy will pick up steam before most other economies may strengthen the dollar in exchange markets, in reaction to projected rising interest rates here. At the same time, however, the U.S. trade balance is expected to fall back from recent surpluses and probably revert to deficits around the end of the year.
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