Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 16, 1974 : Greenbook

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

The attached document represents the most complete and accurate version available
based on original copies culled from the files of the FOMC Secretariat at the Board
of Governors of the Federal Reserve System. This electronic document was created
through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned
versions text-searchable. 2 Though a stringent quality assurance process was
employed, some imperfections may remain.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

In some cases, original copies needed to be photocopied before being scanned into electronic
format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced
tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other
blemishes caused after initial printing).

A two-step process was used. An advanced optical character recognition computer program (OCR)
first created electronic text from the document image. Where the OCR results were inconclusive,
staff checked and corrected the text as necessary. Please note that the numbers and text in charts and
tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Content last modified 6/05/2009.

CONFIDENTIAL

CURRENT ECONOMIC
and
NCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

July

10,

1974

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

July 10,

1974

TABLE OF CONTENTS

Section
I

DOMESTIC NONFINANCIAL SCENE
Summary and GNP outlook .
..
.
. ..
. ...
Industrial production
.
. . . . . . . . .. .
Retail sales
.
.
.
Unit sales of consumer durables
Michigan Survey Research Center .
survey of consumer attitudes . . .
Manufacturers' orders and shipments ...
. a. . . . .
Inventories . . . . . .
Cyclical indicators . . . . . . . .
Construction and real estate . . . .
. .
Labor market . . . . . . . .
. . . . . . . . .. . . . . .
Earnings
. . . .
Collective bargaining .
Recent wholesale price developments .
.
. . .* . . .
Consumer prices
. . . . . . .
Agriculture

. . . ..

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

- 1
-8
8
- 9

. . ..

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

. . .
.

. .
.
.
.
. .
.

. .

. .
. .

.. . .

-11
12
-13
* * . .
-15
. . . . .
-16
..
. . . .
. -17
-19
. . .
-21
. . .
23
.
.
-23
. . .
.27
.. .
*

......

*
.

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

DOMESTIC FINANCIAL SITUATION
. . . . . . . .
Summary and outlook .
. .................
Monetary aggregates ...
Bank credit . . . . .. . . . . . . .
Nonbank financial intermediaries . .
. . .
Long-term securities markets
. . .
. . . . .
Consumer credit .
. . . . .
Short-term interest rates
. . . . . . . . . .
Mortgage market
. . .
. . . .
.
Federal finance

. .
.
.
.
.
.
.

.
.
.
.
.
.
..

. .
.
.
.
.
.
.
.

.
.
.
.
.
.

.
.
.
.
.

. . . .

.
.
.
.
.
.

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

INTERNATIONAL DEVELOPMENTS
. .
Summary and outlook
Foreign exchange markets
Euro-dollar market . .
U.S. balance of payments
U.S. Merchandise trade .

Page

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

- 1
6
8
-12
-14
17
-19
-23
-27

III
. .
.
. .
. .
. .

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

. .

. . .

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

Economic activity in major foreign industrial countries . . ..

- 1
- 3
- 5
- 7
-10

-14

DOMESTIC NONFINANCIAL
SCENE

July 10, 1974
I --

T - 1

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

Period

Release
Date

Data

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

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

June
June
May
June
June
June

7/5/74
7/5/74
6/28/74
7/5/74
7/5/74
7/5/74

90.9
5.2
3.3
77.1
19.9
57.2

3.21/
5.23.3S.7
-1.3
- .5

3.31.6
1.4
1.7

June
June

7/5/74
7/5/75

36.8
4.17

36.81
4.14-

1/
36.8.
4.07-

June
May

7/5/74
6/29/74

40.1
130.1

1/
40.3-1
15.9

40.41
9.4

40.6kI
6.9

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

May
May
May
May

6/21/74
6/21/74
6/21/74
6/21/74

145.5
159.5
134.6
149.4

12.7
10 .6
15.3
12.2

10.9
4.1
15.1
9.9

10.7
15.7
9.6
8.6

Wholesale prices (1967=100)
Industrial commodities
Farm products & foods & feeds
3/
Personal income ($ billion)-

May
May
May

6/13/74
6/13/74
6/13/74

154.4
150.1
166.4

15.5
32.8
-26.1

14.6
34.6
-27.3

16.4
20.1
8.1

May

6/20/74 1121.1

11.5

9.6

191/
1.91/

2.4
4.61/
2.7-'
2.1
.3
2.7
1/

10.1

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

May
May
May
May

7/2/74
7/2/74
7/2/74
7/2/74

46.7
14.0
11.9
2.1

5.9
4.1
- .1
36.7

10.5
3.9
4.4
1.1

12.5
18.4
18.7
16.7

Inventories to sales ratio:
Manufacturing

May

7/2/74

1.62

1.62-1

1.59 1

May

7/2/74

.700

.714-1/

.721/
.72
1-

1/
.70&-/

Retail sales, total ($ bil.)
GAF

May
May

7/9/74
7/9/74

44.6
11.8

.7
1.6

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

June
June
June

7/5/74
7/5/74
7/5/74

9.2
8.0
1.2

3/
Housing starts, private (thous.)Leading indicators (1967=100)

May
May

6/19/74
6/29/74

Ratio:

Mfrs.' durable goods inventories to unfilled orders

1/ Actual data.

Not seasonally adjusted.

1,450
173.3

.4
1.5
-2.8
-11.1
.2

At annual rate.

3.4
4.0

6.9
8.5

3.3
8.4
-17.0

-23.0
-2)0 .2
-34.0

-24.6
1.9

-37.8
6.4

I - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS

The staff currently is estimating that real GNP changed
little--or

possibly edged down--in the second quarter.

There are no

present indications of an emergence of forces making for significant
Meanwhile, the upward momentum of nonfarm prices

economic expansion.

continues very strong, and wage rates have been rising at an exceptionally rapid rate in

recent months.

Productivity in the private non-

farm economy apparently declined further in
In June,
little,

industrial production is

the second quarter.
estimated to have changed

following two months of moderate increase.

Auto assemblies

were maintained at the May rate, and highly tentative data suggest

that output of business equipment, steel, and some other major
materials was relatively stable.
industrial output is
the first

For the second quarter as a whole,

estimated to have risen around 1/2 per cent from

quarter.
Conditions in the labor market in June were about unchanged.

The unemployment rate remained at 5.2 per cent, as the second consecutive increase in the civilian labor force was matched by a rise
in

total employment (household series).

However,

nonfarm payroll

employment edged down, following two months of sizable increase.

manufacturing, both employment and the workweek were lower in June.
For the second quarter as a whole, nonfarm payroll employment increased
by about 400,000.
Consumer spending has remained sluggish.

Weekly data suggest

a slight decline in the dollar volume of retail sales in June,

I - 2
following a moderate increase in May.

Unit sales of autos, however,

edged up in June, with imports unchanged after several months of
decline.

For the second quarter as a whole, the increase in retail

sales is estimated to have about matched the apparent rise in prices.
Both housing starts and residential building permits were
down sharply in May, and for the quarter as a whole, starts probably
were below the level of the two preceding quarters.
Manufacturers' new orders for durable goods rose sharply in
May, as they had in April, with primary metals especially strong.
Nondefense capital goods orders remained at the advanced April level.
The limited data now available on business inventories indicate a
large rise in book value in the second quarter.

On a GNP basis--that

is, after adjustment for the increased value of stocks because of
higher prices--inventory investment apparently remained relatively low.
Wage rates increased at an exceptionally rapid rate in Hay
and June.

For the second quarter as a whole, the adjusted hourly

earnings index for the nonfarm sector rose at an annual rate of about
9-1/2 per cent; in June, the index was about 8 per cent above a year
earlier.
From mid-May to mid-June, prices of farm products declined
for the fourth consecutive month.

More recently, however, farm prices

have been rising, particularly for meat animals.

The wholesale price

index for June is not yet available, but announced price increases

I-3
for steel, chemicals,

autos and other commodities indicate that

industrial commodity prices probably advanced considerably further.
In May,

the consumer price index had risen 1.1 per cent, with increases

widespread among commodities,

including foods,

and services.

The

consumer index was almost 11 per cent above a year earlier.
Outlook.

Staff projections through mid-1975 incorporate the

following monetary and fiscal policy assumptions.

(1)

Growth in M1

is assumed to average an annual rate of about 5-1/4 per cent in the

second half of 1974 and to be somewhat higher in the first half of 1975.
This would imply that short-term interest rates by the end of the

projection period would be somewhat above current advanced levels
unless GNP growth is

weaker than we are projecting.

public employment program is

still assumed.

(3)

(2)

An expanded

Other Federal

expenditures are assumed to remain close to the budget for fiscal 1975.
Real GNP is now projected to change little

in the third

quarter and then to expand at a minimal pace to mid-1975.

From the

second quarter of 1975 to the second quarter of 1975, real growth is
now projected to amount to less than 1 per cent, a slower rate than
expected four weeks ago.
The further downscaling of real growth reflects a weaker
housing outlook than appeared likely four weeks ago, a somewhat larger
projected decline in net exports and continued sluggishness in real
consumer purchases.

Housing starts are now expected to remain at

I-4
the reduced second quarter rate in the last two quarters of 1974 and
to decline somewhat in the first half of 1975.

These downward

revisions reflect greater weakness in multifamily starts than had
been anticipated, in part, because of increasing difficulties in
construction financing.

The housing projection does not, however,

make allowance for any serious deterioration of savings inflows to
thrift institutions attributable to the spread of new competitive

market instruments.
Price prospects also appear bleaker than four weeks ago.
The price increase for industrial products has been larger and more
pervasive than anticipated, and increases for fuels, materials, and
intermediate products are likely to be passed on through later production stages.

Also important is the sharply accelerated pace of

increase in wage rates; the emerging pattern of wage increases and
the prospect of prices rising more rapidly has caused us to raise our
projections with respect to compensation per manhour and unit labor
costs.

The increase in the GNP fixed-weight price index has been

raised by an average of about 3/4 per cent over the next four quarters.
In the fourth quarter of this year, this index is now projected to be
rising at an annual rate of almost 8 per cent, and in the spring of
next year at a 6 per cent rate.
With growth in real GNP now projected to average less than
1 per cent over the next four quarters, total employment is expected

I-5
to change relatively little rather than increasing as had been anticipThe unemployment rate is now projected to rise

ated four weeks ago.

to about 6-1/2 per cent by mid-1975, even though growth in the civilian
labor force is expected to be relatively slow.
STAFF GNP PROJECTIONS
Per cent change annual rate
Gross private
Changes in
nominal GNP

$ billion
6/12/74
1971
1972
1973
1974

1/
1/
1/
1/

7/10/74

78.3
99.7
133.9
107.2

78.3
99.7
133.9
103.2

43.3

29.5

32.5
33.0

14.7
27.8
29.5
33.9

14.7
23.1
29.2
32.5

1975: I
II

27.4
25.0

26.5
24.5

73-IV

138.3

73-IV to
74-IV

105.9

74-11 to
75-II

115.8

1973: I I/

III I/
IV I/
1974: I 1/

product
Real GNP
6/12/74 7/10/74

fixed weighted
price index
6/12/74 7/10174

Unemployment
rate

6/12/74 7/10/74

- .8

4.6
3.2
6.1
9.6

4.6
3.2
6.1
9.7

5.9
5.-6
4.9
5.5

5.9
5.6
4.9
5.4

8.7
2.4
3.4
1.6

7.0
7.9
7.0
8.6

5.0

4.9
4.7
4.7

13.5
9.4
7.6
7.1

13.5
9.0
8.8
7.8

5.2

3.2
6.1
5.9

- .6

8.7
2.4
3.4
1.6
-6.3

-6.3

- .5

- .8

1.3
2.2

.2
1.3

1.6
1.6

,.8

6.0
5.3

6.7
6.0

138.3

4.0

7.8

98.5

- .9

9.4

9.8

6.5

7.3

5.2

5.1

5.6
5.9

5.5
5.8

6.1
6.3

6.2
6.5

- .6

Change:
72-IV to

j/ Actual.

112.7

1.7

-1.5
.8

CONFIDENTIAL

I - 6

- FR

July 10, 1974

Confidential - FR

I - 6
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1974
Proj.

1974

1975

III

Projection
IV

1392.3
1386.8
1076.6
1076.2

1352.2
1346.7
1048.9
1038.0

1375.3
1372.1
1066.3
1065.1

1404.5
1398.0
1083.8
1089.0

1437.0
1430.5
1107.3
1112.8

1463.5
1457.0
1126.5
1134.9

1488.0
1481.5
1144.2
1154.5

Personal consumption expenditures
Durable goods
Nondurable goods
Services

876.5
132.4
374.0
370.1

844.6
125.0
362.3
357.3

867.2
131.2
370.0
366.0

887.5
135.0
378.0
374.5

906.8
138.5
385.8
382.5

925.1
141.5
393.1
390.5

942.3
143.5
400.3
398.5

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

205.2
49.2
150.5
5.4
4.9

198.9
49.3
144.1
5.5
5.0
2/
1

201.1
49.4
148.5
3.2
2.5

208.1
49.1
152.5
6.5
6.0

212.5
49.1
156.9
6.5
6.0

216.3
49.1
160.7
6.5
6.5

218.7
47.9
164.3
6.5
6.5

0.9/
130.4'
119.4

1.2
135.2
134.0

-5.2
134.4
139.6

-5.4
136.7
142.1

-8.4
136.9
145.3

-10.3
138.0
148.3

Gross National Product
Final purchases
Private
Excluding net exports

Net exports of goods and servicesExports
Imports

.4
134.2
133.8

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

310.2
116.0
78.4
37.6
194.2

297.8
112.1
76.3
35.8
185.7

305.8
114.4
77.0
37.4
191.4

314.2
116.8
78.5
38.3
197.4

323.1
120.7
81.9
38.8
202.4

330.5
122.4
83.0
39.4
208.1

337.3
123.9
84.0
39.9
213.4

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)

830.7
167.6

831.0
162.7

829.4
165.8

829.9
169.2

832.6
172.6

834.3
175.4

836.0
178.0

1135.7
753.3
965.1
62.5
6.5

1094.4
726.2
931.4
61.5
6.6

1121.5
744.7
954.1
61.2
6.4

1150.5
762.7
977.2
63.4
6.5

1176.2
779.4
997.7
63.7
6.4

1202.3
796.9
1019.3
66.0
6.5

1227.2
813.5
1039.5
68.1
6.6

114.0
144.3

112.9
144.0

110.9
146.7

113.7
143.0

118.5
143.5

117.0
136.5

115.5
132.5

Receipts

294.5

285.6

292.2

296.9

303.2

307.3

311.4

Expenditures

298.5

282.3

294.4

304.6

312.5

319.1

325.1

-4.0

3.3

-2.2

-7.7

-9.3

-11.8

-13.7

3.0

2.4

1.8

7.6

15.2

20.3

3.7

4.6

4.5

3.1

2.9

1.3

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

93.1
2.3
90.9
5.4

92.8
2.3
90.5
5.2

92.9
2.3
90.6
5.1

93.2
2.2
91.0
5.5

93.5
2.2
91.3
5.8

93.8
2.2
91.6
6.2

94.1
2.2
91.9
6.5

Nonfarm payroll employment (millions)
Manufacturing

77.0
19.9

76.7
19.9

77.1
19.9

77.1
19.8

77.2
19.8

125.7
80.0
89.8

124.9
80.5
90.2

125.2
80.2
90.5

125.9
79.9
89.6

126.6
79.6
88.9

127.3
79.3
88.0

127.9
76.9
87.1

1.54
9.22

1.63
9.04

1.51
9.20

1.50
9.25

1.50
9.40

1.45
9.50

1.40
9.50

Domestic models

7.90

7.49

7.95

8.00

8.15

8.25

Foreign models

1.33

1.55

1.25

1.0

11.6

1.8

-4.6

-4.8

-7.8

-9.7

135.2
134.2

131.5
119.9

136.3
134.5

135.5
140.1

137.8
142.6

138.0
145.8

139.1
148.8

Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)
Corporate profits & inventory val. adj.
Corporate profits before tax
Federal government receipts and
expenditures, (N.I.A. basis)

Surplus or deficit (-)
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.)

Net exports of g. & s. (Bal. of Paymts.)
Exports
Imports

Includes effects of shipments of military equipment and supplies

to Israel; for 1974-1 these are

now estimated at $.5 billion, annual rate, and considered as a sale, all from U.S.
and thus reducing defense purchases by that amount.

military stocks

CONFIDENTIAL

I - 7

FR
CHANGES

July 10, 1974

IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
Proj.

1974
I

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

GNP in constant (1958)
Final purchases
Private

dollars

103.2
-2.6
105.7
72.6
-5.4
78.0
72.5
1.6
38.1
32.8
-8.8
14.3
33.1
9.4
23.7

14.7
-12.5
27.3
15.1
-1.9
17.0
19.4
- .6
12.7
7.3
-4.7
2.3
12.2
5.3
6.9

-6.7
-4.1
-6.4

-13.6
-4.6
-7.3

1975

III

Projection
IV

Billions of Dollars----------------29.2
3.3
25.9
17.5
-6.4
23.9
20.2

3.7
8.0
8.5
-. 3

4.0
8.4
2.4
6.0
-1.6
.7
.7

.5
-2.4
-2.7

2.7
2.6
3.2
/

-----Per ent Per Year 1
-------------------Per Cent Per Year8.0
8.3
7.2

4.5
8.5
6.0

7.0
7.8
6.8

8.8
7.8
6.7

9.6
9.6
9.0

7.6
7.6
7.1

6.9
6.9
6.4

9.0
1.2
11.3
9.7

9.7
-1.9
15.3
8.6

11.1
21.4
8.8
10.1

9.7
12.1
8.9
9.6

9.0
10.8
8.5
8.8

8.3
8.9
7.8
8.6

7.6
5.8
7.5
8.4

-25.2
-30.5
6.6

4.5
.8
12.8

14.7
-2.4
11.2

8.7
.0
12.1

7.3
.0
10.0

4.5
-9.4
9.3

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

18.2
21.4
19.3
25.9
16.4

11.2
8.5
3.7
19.1
12.9

11.4
8.7
8.0
10.0
13.1

11.8
14.0
18.5
5.3
10.5

9.5
5.8
5.5
6.3
11.7

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
3/
Private GNP fixed weighted index-

-6.3
-2.2
-4.2 2/
11.513.5

- .8
.3
.4
7.9
9.0

.2
-1.1
-1.6
8.5
8.8

1.3
1.3
1.9
8.1
7.8

.8
.8
1.4
6.7
6.7

5.9
5.1
6.1

10.3
10.6
10.1

10.8
10.0
10.0

9.2
9.1
8.7

9.2
9.3
8.9

Gross National Product
Final purchases
Private
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Residential structures
Business fixed investment

1.5
-15.2
10.5

Personal income
Wage and salary disbursements
Disposable income
Corporate profits before tax

14.3

63.2

7.7

-9.7

1.4

-18.1

-11.2

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

11.1
13.1

17.5
20.2

9.6
18.3

6.6
14.6

8.8
10.8

5.5
8.7

5.4
7.7

1.9
.3

.8
-2.9

1.9
.1

.0
.0

.0
-1.0
2.2
-12.7
4.3
5.0
.0

2.1
-13.1
.0
.0
.9

Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models

.0
-24.5
-19.4
-18.3
-24.9

-6.5
11.6
-35.3
,-38.0
-19.8

1.1
-26.0
7.2
27.1
-58.2

1/ Percentage rates are annual rates compounded quarterly.
2/ Excluding Federal pay increases rates of change are: 1974-I, 11.4 per cent; 1974-IV,
1975-1, 6.0 per cent.
3/ Using expenditures in 1967 as weights.

7.0 per cent;

I-8

Industrial production.

Industrial production is tentatively

estimated to have changed little in June.

If this estimate holds,

the second quarter average would be 0.4 per cent above the first
quarter level.
Auto assemblies in June, which had been scheduled at an 8.1
million annual rate were reduced by a strike at Ford and output
remained at the May level of 7.7 million units.

Auto production

schedules for the third quarter have been revised upward to an 8.7
million rate, reflecting a decision to produce a larger number of
1974 models in July.
Estimates of output in the business equipment area and in
the electric power based sector of the total index based on production worker manhours were both about unchanged in June.
Production of raw steel and of the chemical, textile,
and paper group apparently changed little.
(Note:

The June production index will be ready for the Friday

supplement.)
Retail sales.

Our estimate of retail sales for June based

on the weeks through June 29 suggests that sales were off about half a
per cent from May with little strength evident in any major categories.
More complete sample counts have raised earlier estimates of sales in
April and May; April is now 0.9 per cent above March and May is 0.7
per cent above April.

I-9
RETAIL SALES (REVISED)
(Seasonally adjusted)
--Millions of dollars-April 1/
May 1/

Per cent change
pervious month
April 1/
May 2/

Total sales

44283

44612

Durable
Auto

13941
7644
2163

14185
7818
2203

2.1
3.3
-1.3

1.8
2.3
1.8

30342
9689
7438
3236

30427
9744
7518
3314

1.0

-1.4
2.6

1.1
2.4

Total, less auto and
nonconsumption items

33879

34024

GAF

11611

11802

Furniture & appliance
Nondurable
Food
General merchandise
Gasoline stations

1/
2/

Final estimate.
Preliminary estimate.
Unit sales of consumer durables.

-2.3

1.6

Sales of new domestic-type

autos in June were at an 8.0 million unit annual rate, slightly above
figures for April and May (revised upward because of changes in the
seasonal factors) but a fifth below a year earlier.
were off 4 per cent from May,
equal percentage.

Small car sales

While large car sales were up by an

Small cars accounted for 30 per cent of domestic-

type sales in June, the same as a year earlier but well below the
recent high of 39 per cent in January.
Preliminary estimates indicate that foreign car sales were

at a 1.2 million unit rate in June, the same as in May but a third
below last June.

Imports accounted for 13 per cent of total auto sales,

down from 16 per cent in June of last year.

I - 10

Stocks of domestic-type new cars declined further in June
to the equivalent of a 53 days supply, compared to a 57 days supply
at the end of May.

The stock/sales ratio in June of last year was at

a 46 days supply.
Factory sales of major home appliances, TVs, and radios in
the first three weeks of June remained at the May level but were 4
Sales of color TVs and radios were

per cent below June of last year.
up substantially from May.

SELECTED SALES OF CONSUMER DURABLES
Seasonally adjusted
1973
June

April

1974
May

June

Per cent change from
Month ago
Year ago

Annual rates, millions of units
Auto sales, total
Foreign
Domestic
Large
Small

11.9r
1.8
10. r
7.1r
3.Or

9.2r
1.3
7.9r
5.3r
2.6r

9.1r
1.2
7.9r
5.4r
2.5r

9.2
1.2
8.0
5.6
2.4

1
0
1
4
-4

-23
-33
-20
-21
-20

Indexes, 1967=100
Home goods factory
Unit sales
TVs 1/
Radios 1/
Major appliances
1/
e/
r/

160
173
79
155

145
149
75
148

154
165
115
148

154 e
170 ie
170le
142 e

Includes domestic and foreign label imports.
Estimated on the basis of data through June 22.
Revised.

-4
- 2
115
- 6

I - 11

Michigan Survey Research Center survey of consumer attitudes.
The Michigan index of consumer sentiment--a composite of five questions
on personal financial situations, business conditions, and whether it
is a good time to buy household durables--indicated less pessimism in
April and May than when the previous survey was taken in February,
at the height of the energy crisis.

However, attitudes were still

somewhat less favorable than last fall and the index of these responses was notably lower than in past cyclical downturns.
The unusually low level of the index of consumer sentiment
both before and after the energy crisis appears to be the result of
intensified inflationary expectations and lack of confidence in
government economics policies.

For some time, those survey respondents

who expected at least 10 per cent inflation and who think the government will be unsucessful in dealing with economic problems also have
tended to have unfavorable attitudes toward personal financial
situations and business conditions.
At present, however, a willingness to buy ahead of expected
price increases may have loosened the relationship between the index
of sentiment and outlays for household durables.

In other downturns

in consumer sentiment, large increases in pessimism about personal
financial situations and business conditions were associated with
marked deteriorations in the percentage of households who thought it
was a good time to buy household durables.

In contrast to earlier

I - 12
experience, the percentage of households who continue to think that
it is a good time to buy large household durable has declined rather
moderately over the last 18 months.

In the April-May survey, more

respondents still said that it was a "good time" to buy large household durables (39 per cent) than said it was a "bad time" (22 per cent).
On the other hand, for over a year,

consumers have not changed their

opinions that market conditions for autos or homes are unfavorable
because of high prices, high operating costs, and interest costs.
Manufacturers' orders and shipments.

New orders for durable

goods rose 5.9 per cent in May (p), following a 5.1 per cent increase
in April.

The gain in May was widespread with especially strong

advances in primary metals, machinery and aircraft.

Nondefense capital

goods orders were virtually unchanged following a 5.5 per cent increase
in April.

In real terms, durable goods orders rose 3.6 per cent in

May, but nondefense capital goods orders were off 2.2 per cent.
Shipments of durable goods were up 2.9 per cent in May and
unfilled orders increased by 3.7 per cent.

I - 13

MANUFACTURERS'

NEW ORDERS FOR DURABLE GOODS
(Per cent changes)

Durable goods, total

Excluding defense
Excluding primary metals and
motor vehicles and parts
Primary metals
Motor vehicles and parts
Household durables
Nondefense capital goods
Defense capital goods
Construction and other durables

Durable goods total, in 1967$
Nondefense capital goods, in 1967$

1973
QIV from

QI fro n

1974
May from

QIII 1/

QIV 1//

April (p)

2.3

-1.6

5.9

1.5

-1.9

4.8

5.1
.3
-7.2
4.2
5.7
22.4
2.8

2.2
-3.4
-17.1
1.1
2.1
5.7
2.0

3.1
20.0
2.4

-5.7

3.6

4.1

-2.2

6.7
-

36.7
1.3

Changes between quarters are based on quarterly averag e levels.
Inventories.

Book value of manufacturing and wholesale

trade inventories increased at a $35 billion annual rate in May (p),
following a $23 billion rise in April.

The $28 billion annual rate

of rise in manufacturing stocks in May occurred mainly in durable
goods, particularly nonelectrical machinery, blast furnaces and steel
mills and the non-auto components of transportation equipment.

stage of processing, the acceleration in rate of increase was mainly
in materials and supplies.

Wholesale trade inventories increased at

an $8 billion rate following a $1 billion decline in April.

I - 14

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

1973

Manufacturing and trade
Manufacturing, total

1974
May (p)

QIII

QIV

21.1
12.4

36.5
19.0

36.9
22.5

n.a.
27.9

Durable

9.8

12.8

14.3

17.2

Nondurable
Trade, total
Wholesale
Retail

2.6
8.7
4.5
4.2

6.3
17.5
6.6
10.9

8.2
14.4
9.7
4.7

10.7
n.a.
7.5
n.a.

Auto

1.2

4.4

- 2.5

n.a.

The manufacturing inventory-sales ratio was unchanged at 1.62
in May, while the wholesale trade ratio increased from 1.04 to 1.08.
The ratio of inventories to unfilled orders at durable goods producers
declined to .700 in May.
INVENTORY RATIOS
1973

Inventories to sales:
Manufacturing and trade
Manufacturing, total
Durable
Nondurable
Trade, total
Wholesale
Retail

1974
May

Apr.

May

Apr.

(p)

1.44
1.59
1.91
1.21

1.44
1.59
1.90
1.21

1.45
1.62

n.a.

2.04
1.17

2.02
1.18

1.30
1.13
1.42

1.30
1.15
1.41

1.28
1.04
1.47

n.a.
1.08
n.a.

.786

.714

.700

1.62

Inventories to unfilled orders:
Durable manufacturing

.806

I - 15

Cyclical indicators.

The Census composite index of leading

indicators rose 0.2 per cent in May (p),

following no change in April.

The Boston FRB deflated leading index (with no trend adjustment) was
off 1.3 per cent; the Census deflated coincident index rose for the
third straight month.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from prior month)
1973
Dec.

Jan.

Feb.

1974
Mar. Apr. May (p)

12 Leading, trend adjusted

-1.8

1.9

1.1

1.7

5 Coincident

- .2

- .4

5 Coincident, deflated

-1.1

-1.4

- .2

1.7

1.2

6 Lagging

2.1

2.3

.2
1.0

Leading indexes prior to trend adjustment
Census undeflated

-2.1

1.5

1.3

- .4

- .2

Boston FRB deflated

-3.5

-1.1

-1.3

Of the eight leading series available for May,

those in-

creasing were the ratio of price to unit labor cost, initial claims
for unemployment insurance (inverted),

the average workweek in manu-

facturing, new orders for durable goods, and contracts and orders for
plant and equipment.

Industrial materials prices,

common stock prices,

and private building permits all declined.
Of the indicators currently available for June, the average
workweek declined but common stock prices improved a bit.

I - 16

Construction and real estate.

Seasonally adjusted value of

new construction put in place in June, at an annual rate of $135.7
billion, held at the May level.

However, expenditures for private

residential building approached a new low for this year and were
almost a fifth below the peak in February 1973.

Private nonresidential

outlays remained little changed from their recent high in March, and
outlays for public construction rose somewhat, but stayed below their
April peak.

For the second quarter as a whole, total outlays averaged

only 1 per cent below the high reached in the third quarter of last
year.
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)
1973
QII(r)
Total - current dollars
Private

Residential
Nonresidential
Public
State and local

Federal
Total - 1967 dollars
1/
--

Per cent change in
June from
1974
OQIr)]QII(p)June 1'May 1974 June 1973

134.4

134.7

135.7

102.3

98.5

99.0

98.9

- 4

58.1
44.2

49.4
49.1

49.5
49.5

49.2
49.7

- 1
--

-15
+10

32.2

36.3

36.7

36.8

+ 2

+17

27.2

31.2

31.6

31.7

+21

4.9

5.1

5.0

5.1

+18

+ 5

89.6

83.3

82.0

81.6

- 8

Data for June 1974 are confidential Census Bureau extrapolations.
case should public reference be made to them.
Means change less than 1 per cent.

In no

I - 17

Measured by the Census Bureau's composite index, construction
costs in recent months have continued more than a tenth above year
earlier levels.

For the year 1973, such costs were up almost 9 per

cent from 1972.
With private housing starts down sharply in May and residential
building permits substantially reduced, it now appears that starts in
the second quarter as a whole may have dropped below the reduced rate
of the fourth quarter of 1973.

As in the first quarter, the April-

May average for single-family starts showed some improvement.

However,

starts of multifamily units dropped considerably further, owing to the
still very large volume of units under construction and the adverse
influence of increasingly higher costs for materials and construction
loans.

Moreover, difficulties currently being experienced by the

REITs, which tend to specialize in interim financing for this sector,
have also been an inhibiting factor.
Labor market.
conditions during June.

There was little overall change in labor market
The unemployment rate remained at 5.2 per

cent, seasonally adjusted, and nonfarm payroll employment changed
relatively little.

The factory workweek declined somewhat as overtime

hours were curtailed.
The unemployment rate has been on a plateau a little

above

5 per cent since the beginning of the year, following a rise from
last October's low of 4.6 per cent.

Unemployment among adult men and

I - 18

blue-collar workers dipped in May, but their jobless rates returned
to previous levels in

June,

and unemployment among most other groups

remained about unchanged.

SELECTED UNEMPLOYMENT RATES
(Per cent, seasonally adjusted)
June

1973
October

January

1974
May

June

4.8
3.2
4.9
14.0

4.6
3.0
4.4
14.0

5.2
3.4
5.2
15.6

5.2
3.4
5.1
15.8

5.2
3.5
5.1
15.6

White collar
Blue collar

2.9
5.3

2.6
5.1

3.2
6.0

3.2
5.7

3.1
6.2

Household heads
State insured

2.9
2.8

2.7
2.6

3.0
3.1

3.0
3.3

3.1
3.4

Total
Males 20+
Females 20+
Teenagers

The civilian labor force and total employment rose by about
a quarter of a million in
May.

June,

following an even larger increase in

The gains in the labor force were in sharp contrast to the

sideways movement shown during the January-April period.

Since

January the adult female labor force has advanced at a rapid pace,
but this increase has been partially offset by declines among teenagers and adult men.
A small decline in nonfarm payroll employment in
followed substantial gains in April and May.

June

Manufacturing employ-

ment fell by 20,000, and the factory workweek shortened by 0.2
hours to 40.1 hours--a half hour less than a year ago.

Construction

I - 19

employment fell again in

June, in

part due to increased strike activity,

putting the total 150,000 below the February level.

Employment in

services and State and local government--two sectors which have
generally been a source of employment strength throughout the recent
period--again showed considerable gains in June.

Since November 1973,

nonfarm payroll employment has advanced at an annual rate of less than
one million, compared with 2.7 million over the four quarters of 1973.

CHANGES IN PAYROLL EMPLOYMENT
(In thousands; seasonally adjusted)
1972 QIV1973 QIV

Nov. 1973June 1974

-------Annual rate------

May 1974June 1974
Monthly change

Total nonfarm

2,749

734

-48

Private
Manufacturing
Durable
Nondurable
Construction

2,379
759
648
111
197

195
-303
-189
-115
-171

-50
-22
+ 5
-27
-50

Trade

562

132

- 8

Services

603

453

Government

370

538

+ 2

Earnings.

The average hourly earnings index for private

nonfarm production workers has been rising at an accelerated pace in
recent months.

For the second quarter as a whole the nonfarm total

was up at a 9.6 per cent annual rate.
been occurring in most industries,

Large earnings increases have

with the fastest rates of rise in

I - 20

manufacturing, trade and services.

In the construction industry, the

earnings index has also been rising more rapidly, after a period of
moderate increases when wages were under control of the Construction
Industry Stabilization Committee.
HOURLY EARNINGS INDEX*
(Seasonally adjusted; per cent change, compound rates)

Total private nonfarm
Manufacturing

Jan. 1972Feb. 1973

Feb. 1973Dec. 1973

Jan. 1974June 1974

1974 QI1974 QII

5.5
5.3

7.4
7.0

9.8
11.0

9.6
11.2

Construction

5.5

7.4

10.4

8.5

Transportation & p.u.
Trade
Services

9.5
4.7
4.2

6.9
7.5
7.6

5.1
10.1
9.1

4.3
10.0
10.0

Excludes effects of fluctuations in overtime premiums in manufacturing
and of shifts of workers between industries.

I - 21

Collective bargaining.

A number of recent collective bar-

gaining settlements have provided large wage increases.

The longshore-

men at North Atlantic seaports settled for a wage and fringe package
estimated to cost more than 33 per cent over-the-life of the three year
Workers will receive a first year wage increase of nearly

contract.

15 per cent on October 1 and about 8-1/2 per cent in each of the next
two contract years.

Prior to the settlement, the longshoremen had

received a 2,5 per cent pay raise on June 1 which restored the amount
that had been disapproved by the Pay Board in May 1973.

The new con-

tract covers 25,000 workers and is expected to set the pattern for an
additional 10,000 dock workers at the South Atlantic and Gulf Ports
where contracts also expire September 30.
In other negotiations, the machinists and Northwest Airlines
reached agreement on a 26 month pact which provides first year wage
increases of about 7-1/2 per cent on top of a 3 per cent pay raise
retroactive to September 1,
about 5 per cent.

1973.

Second year pay raises will average

The cost-of-living formula was liberalized,

but

retains a cap--l0 cents or about 1.3 per cent a year maximum in the
second and third contract years.
workers,

The new agreement, which covers 3,000

identical to the recent United Airlines settlement and is

expected to be closely followed by TWA, National, Continental, and
Allegheny where negotiations are continuing.
The men's clothing workers settled on a three year agreement
which will give them pay raises of about 13 per cent in
and about 7 per cent in

the first

year

each of the remaining contract years as well as

a cost-of-living escalator--the first

the clothing industry--which

I - 22

will pay out a maximum of 10 cents an hour or 2.4 per cent in the
second and 15 cents or 3.3 per cent maximum in the third contract year.
Finally, the steel workers and seven other unions apparently
reached agreement with Anaconda Company on a new three year contract.
Although the terms have not yet been released, it is estimated that
the pact is very similar to the basic steel settlement negotiated
earlier in the spring.

Bargaining is continuing with other major

nonferrous metal companies, affecting a total of 115,000 workers.

I - 23
Recent wholesale price developments.

Price developments in

recent weeks have been less encouraging than had been hoped.

Prices of

farm products declined from February to mid-June (a sizeable May-June
drop will be reflected in

the June WPI which will be released July 12

and reported in the Greenbook supplement, but in recent weeks prices of
foodstuffs have risen appreciably.

and

Spot prices for corn, wheat,

soybeans have all increased, reflecting uncertainty over crop yields
and high export demand.

Prices of steers and hogs--particularly the

latter--have also moved up,

although this could be a temporary develop-

ment resulting in part from a hold-back on marketings of meat animals.
Spot prices of industrial materials have for the most part
been firm except for such agriculturally-based raw materials as cotton,
hides, and rubber.

Prices of copper scrap and aluminum scrap in some

areas nave dropped from peak spring (April-May)

levels,

but steel

scrap prices have rebounded to levels approaching earlier highs in
April.

Recently, announcements have been made of further substantial

price increases for steel mill products, lead, and fabricated aluminum
products.

Prices of chemicals also have been increased sharply.
In the finished goods category, announcements of higher prices

for motor vehicles have been prominent.
Consumer prices.

Consumer prices rose at a 13 per cent

annual rate, seasonally adjusted, in May to a level nearly 11 per
cent above a year earlier.
their April decline.

Food prices advanced appreciably following

Increases in energy costs, although substantial,

were well below the peak first-quarter rates, but prices of other
nonfood items rose considerably faster than in

earlier months this year.

I - 24

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
1/
Relative
importance
Dec 1973
All items
Food
Commodities less
food
Services-2
Addendum
All items less
food and energy
components 3/ 4/
Services less home
finance 2f / 5/
Commodities less
food, used cars,
home purchases 3/
1/
2/
3/
4/
5/

June 1973
to
Sept 1973

Sept 1973
to
Dec 1973

Dec 1973
to
Mar 1974

March
to
April 19 74

April
to
May 1974

100.0

10,2

9.2

14.2

6.9

12.7

24.8

26.7

11.0

19.4

-5,3

10.6

38.6
36.5

3.6
7.4

7.6
9.4

16.0
9.2

12.8
7.3

15,3
12.2

68.8

5.6

5.5

8.6

7.9

13.9

29.9

4.8

7.2

10.2

8.4

12.6

30.9

3.0

10.1

19.0

11.8

12.6

Not compounded for one-month changes.
Not seasonally adjusted.
Confidential--not for publication.
Excludes food, gasoline and motor oil, fuel oil and coal, and gas and electricity.
Home financing costs excluded from services reflect property taxes and
insurance rates--as well as mortgage costs--which in turn move with mortgage
interest rates and house prices.

The rise in food prices in May--despite
poultry and eggs--was

declines for meat,

in large part the result of a very sharp increase

for fresh fruits and vegetables.

In June retail meat prices continued

to fall--according to USDA's chainstore sample data (preliminary, confidential).

Recent advances in livestock prices may have an impact on

subsequent months but are still expected to be temporary.

I - 25

FARM-RETAIL SPREADS,

(Index,
QI
142.6
177.7
150.9
133.2
130.3

Market basket
Beef
Pork
Milk
White bread

1974

Per cent change 1/

1967=100)

QII 2/

24.2
17.5
34.6
21.2
31.4

19.6
25.8
42.2
17.1
19.5

154.8
174.7
164.7
138.7
149.2

Source: USDA
1/ From same quarter of 1973.
2/
April-May averages; May estimate preliminary, confidential.

The widening of farm-retail spreads has contributed very
importantly to the increase in retail food prices over the last year.
In the first quarter they were nearly 20 per cent, and in the second
quarter about 24 per cent (preliminary, confidential), above their levels
a year earlier.

These estimated spreads--which reflect all nonfarm

costs (wages, packaging, etc.) as well as profit margins of processing
and distribution--accounted for about 55 per cent of the retail cost
of USDA's market basket of foods of U.S. farm origin in the first and
second quarters of 1973.

Their increase thus contributed about half

of the 22 per cent rise in the market basket between the first quarter
of 1973 and the first quarter of 1974.

Using second quarter data

(preliminary, confidential) the estimate would be about 13 out of 16
per cent.
Energy prices rose substantially further in May, as in April,
though much less than in the first quarter.
is

The major impact on prices

now coming from other commodities and from services which have

registered unusually large advances this year.

In view of the recent

pace of price rise for consumer finished goods at wholesale,

a quick

I - 26

slowdown at retail appears unlikely.

The April and May CPI increases

were also boosted by a sharp climb in used car prices--of nearly 20 per
cent in these two months following eight months of decline.

ENERGY PRICES AND THE CPI,1 / 1973
(Percentage changes, seasonally adjusted annual rates) 2/

Relative. Dec 1972
to
importance
Dec 1973 Dec 1973

Sept 1973 Dec 1973
to
to
Dec 1973 March 1974

April
March
to
to
April 1974 May 1974

Gasoline and motor oil,
fuel oil and coal

4.0

23.4

77.3

99.3

29.9

24.2

Gas and electricity

2.4

6.9

11.1

28.2

15.5r

17.9

93.6

8.3

6.9

10.8

6.7

12.6

All items less

energy components

1/
2/

Confidential--not for publication.
Not compounded for one-month changes.

RECENT PRICE CHANGE, SELECTED COMPONENTS
(Per cent change, seasonally adjusted, not annual rates)

Nonfood commodities:
Apparel
Other nondurables 1/
Household durables
Services:
Medical
Housekeeping and
home maintenance
1/

Dec. 1972 to
Dec. 1973
(12 months)

Dec. 1973 to
May 1974
(5 months)

4.1
3.6
4.1

3.7
5.4
4.2

5.8

4.2

7.7

8.4

Excluding fuels, alcohol and tobacco.

I - 27

Agriculture.

Production of red meat in June matched the

record high level in May as increased beef output offset a decline in
pork.

Increased availability of meats was a major factor in the further

reduction of average farm prices of 6 per cent during the month ending
June 15.

But prices have since turned sharply upward.

On July 8,

hog and steer prices were 55 and 25 per cent higher, respectively,
than on June 15, while wheat, corn, and soybeans were about 15 per
cent higher.
The advance in livestock prices mainly has reflected recent
actions by Government and industry to increase demand.

The Department

of Agriculture will purchase more meat for the school lunch program
and negotiations are under way to increase beef exports to Canada and
to restrain imports from Australia and New Zealand.

Also, retailers

recently have promoted beef sales with specials and increased advertising.
The higher price level may be sustained during summer months by shorter
supplies of fed cattle.
Weather,
higher crop prices.

on the other hand,

has been the major factor in

Rains have caused grain and soybean crops to be

planted later than usual and this may result in lower yields.

Also,

erosion and flooding have damaged some areas where planting was finished.
Agricultural officials recently lowered the corn crop estimate from 6.7
to 6.4 billion bushels but the crop will likely be even smaller, though
substantially exceeding last year's large harvest of 5.5 million bushels.
Winter wheat harvest from Texas northward through Nebraska
is

well along if not complete,

but yields have been hurt by dry weather.

I - 28

One well-known private analyst is now forecasting 12 per cent larger crop
than last year as opposed to a 21 per cent larger crop that earlier had
been predicted by agricultural officials.
The Department of Agriculture has raised its estimate of 1973
net farm income by $6 billion, to $32.2 billion.

Crop receipts proved

to be about $4 billion higher than previously estimated, primarily
because sales of grain and soybeans stored from previous years had
been underestimated.

Receipts from livestock were also revised upward

by about $1 billion, and the estimate of production expenses was lowered.
The Department's projection of net farm income for 1974
remains at $24 to $26 billion, but this now appears as a sharp drop
from the 1973 level.

DOMESTIC FINANCIAL
SITUATION

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

Indicator
Indicator---------

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1
M2
M3
Time and savings deposits
(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)
Market yields and stock prices
wk. endg.
Federal funds
Treasury bill (90 day)
Commercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
(FHA/VA)
FNMA auction yield
Dividends/price ratio (Common
stocks)
wk. endg.
end of day
NYSE index (12/31/65=50)

Latest data
Period
Level

36.7
34.8

June
June
June

280.8
597.5
930.9

6.9
9.5
7.8

6.7
7.7
6.6

June
June
June
June

316.6
83.4
333.4
678.7

11.5
2.2
4.7
7.8

8.5
15.7
4.6
11.5

7/3/74

7/3/74
7/3/74
7/5/74
7/4/74
7/1/74
6/26/74

7/1/74

Total of above credits
e

- Estimated

Year
ago

SAAR (per cent)
6.5
20.3
18.2
20.2

June
June

10.2
11.1

5.8
8.7

7.9
11.5
21.4
6.5
12.1

Percentage or index points
3.62
2.10
13.55
7.45
-. 58
-. 96
2.50
1.25
11.95

6.64
9.65

.63
.11

4.14

-.01
-1.95

44.86

Net change or
Current month
1974
1973

Credit demands

Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)
Municipal long-term bonds (gross
offerings)
Federally sponsored Agcy. (net borrowing)
U.S. Treasury (net cash borrowing)

Net change
--------- from
Month
Three
ago
months ago

June
May
April
April

1.8
1.3
5.3
1.7

1.4
2.0
5.3
.9

April
July
June

2.4
4 .5e
2.9

1.S
3.7
2.2

19.9

17.3

3.34

-.24
3.39

.91
.70

1.30
1.79

-. 19

-1.05
-9.31

-4.94

gross offerings
Year to date

1974

1973

18.4
4.6

19 .0
9.4
16 .5
3.9

16.1

7.5

8.5
2 .0e
8.8
65.9

7.8
5.16

9.2
71.4

- 1

DOMESTIC FINANCIAL SITUATION

Total credit flows
in June and early July.

to businesses continued relatively large

As money and credit markets came under

increasing pressure after mid-month, and investor quality preference
became more prevalent,

market financing subsided and credit demands

accelerated at large New York and Chicago banks.
Most recently, yields on CD's and commercial paper rose about
75 basis points as the Federal funds rate increased to around 13-1/2
per cent and short-term credit demands intensified.

In the commercial

paper market, spreads between prime and lower quality issues widened
and rumors have developed about the solvency of some issuers.

early July some regional banks were said to be having difficulty placing
their acceptances or to issue CD's, but at this writing the staff has
been unable to confirm these reports.

Treasury bills have not shared

in the general upward movement in yields as foreign official,

Federal

Reserve, and private domestic demand remained large in the face of low
and often short dealer positions.
In capital markets,

yields on corporate and municipal bonds

rose 30 to 50 basis points, and equity prices declined over 7 per cent-reaching levels last seen in 1970.

Postponements, cancellations, and

reductions of scheduled new issues were quite large in June, amounting
to $575 million of corporate bonds (mostly public utilities), almost
$250 million of stock, and $450 million of tax-exempt issues,
ponements and cancellations have continued into July.

Post-

Rising interest

II - 2

costs were only one factor in these developments.

Underwriters faced

some difficulty in forming syndicates and many issuers have been forced
to add more restrictive covenants to bond indentures (such as 10 year
no call provisions).

Some corporations chose to offer intermediate-

term secutities as a way to tap a wider range of potential investors
and to obtain lower interest costs, but many also shifted their financing to banks.

In the tax-exempt market,

offerings of short-term obliga-

tions rose very sharply as borrowers found themselves blocked by bond
usury ceilings or sought to avoid locking themselves in at high
interest cost.
Although relatively weak in late May and early June, business
loan demands--particularly at New York City and Chicago banks--rose
sharply from mid-June to early July.

Takedowns of commitments are

reported to reflect continued diversions of credit demands from borrowers
unable to finance in the commercial paper market, and financing originally
scheduled for the capital markets.

With declining internal fund flows

and reduced liquidity, many large borrowers are also reported to be
drawing on their lines for the first time in years.

In addition, for-

eign business loans in New York City and in San Francisco remained
large in June.
The pick-up in business loans in New York and Chicago after
mid-June was financed mainly in the CD and Euro-dollar market at rising
rates.

Foreign official and foreign commercial banks appeared to be

large buyers of CD's, and,

for the first time, the staff has reliable

reports that Arab oil proceeds are being invested directly in CD's

II - 3

as well as Treasury issues.

In April and May,

foreign purchases of

Treasury securities apparently had not reflected direct Arab investment.
Seasonally adjusted nonbank thrift

deposit inflows rose in

June from the depressed April-May level and the staff estimates that
small denomination time deposits at commercial banks rose after two
months of decline.

However, available data for late June and early

July indicate that relatively large outflows from the thrift

institutions

are occurring during the mid-year reinvestment period.
The average rate on mortgages in the primary market and secondary markets rose moderately in

recent weeks to new highs,

and FHA/VA

ceiling rates were raised 1/4 percentage point to 9 per cent.
residential mortgage commitments at thrift

New

institutions declined in

and probably in June as mortgage funds continued to be reported in

May
short

supply throughout the country.
Outlook.

Federal financing demands--including those of the

agencies--are expected to be large this summer.
Bank may offer its

first

The Federal Financing

issue of $1 to $1-1/2 billion this month

and over the balance of the third quarter the Treasury and Federal
Financing Bank combined are expected to raise another $4-1/2 to $5
billion.

Sponsored agencies,

mainly those supporting housing--whose

issues are not purchased by the Federal Financing Bank--are also
expected to need $6 billion this quarter.
The expanded Treasury offerings could be expected to raise
bill and other Treasury yields.
issues is

However, the market impact of these

likely to be blunted by foreign official purchases--either

the market or special issues--with an Increasing share of the foreign

II - 4

demand from oil-exporting countries.

If foreign buying is large, the

supply of marketable Treasury issues available to the domestic public
would contract further this summer, although the supply of agency
offerings will expand.

Such developments would tend to widen further

the spread between Treasury and other securities yields.
About 45 per cent of projected corporate bond offerings in
the current month are accounted for by the still uncertain $850 million
offering of Citicorp and $200 million by Chase.

These securities, with

floating rates and "cash in" privileges each six months, are designed
to attract small investors.

As such they are likely to result in out-

flows from thrift institutions and commercial banks, as well as the
Treasury bill market, rather than absorbing funds from traditional bond
investors.

Nevertheless, these issues have affected the scheduling

of regular corporate bond issues, and if these two issues do not
materialize, other more traditional issuers would likely accelerate
their offerings to fill the void in the corporate calendar.

Thus,

under current money market conditions, bond yields would probably rise
from current levels although postponements and cancellations of scheduled
issues could continue.
Inflows of consumer time and savings deposits to banks and
thrift institutions are likely to be under considerable restraint over
the summer, as the pull of market yields continues to shift small savers
to the securities markets.

Marketing of Citicorp and Chase issues

would, of course, increase fund outflows in July from these institutions.
Even if these issues do not come to market, however, new residential

- 5

mortgage commitments can be expected to decline further, mortgage
availability to become even more restricted, and Federal agency support
to the mortgage market even larger.
Business loan demands at banks are likely to continue to be
sustained by takedowns of commitments by borrowers unable or unwilling to finance in money and capital markets.

In the current financial

environment, banks can be expected to tighten their lending terms
further and to review their commitments policies, but to meet their
existing commitments by borrowing mainly in the CD market and perhaps
also the Euro-dollar market.

Large prime banks may continue to attract

time deposits from abroad, but less-than-prime banks could face some
difficulty in placing CD's if financial market confidence deteriorates
further.

II -

Monetary aggregates.

In June, rates of growth of M 1, M 2 , and

M 3 were more rapid than in May, but for the second quarter as a whole
they were below first quarter rates.

Part of the growth of M

in June--

about 1-1/2 percentage points--was attributable to the temporary lodging
of payments to oil-exporting countries in foreign official deposits at
Federal Reserve Banks and commercial banks.

M2 accelerated to almost

twice the rate of the previous month, reflecting both a sharp increase
in inflows to banks of time and savings deposits other than large CD's
and faster growth of M 1 . Staff estimates suggest that the acceleration
of the "other time" component of M2 was due to a reversal of the twomonth decline of small denomination deposits.

As with M 2 , the growth

of M 3 reflected stronger inflows of consumer deposits at thrift institutions.
Loan growth moderated at banks in late May and early June;
consequently, banks did not increase their outstanding CD's, and
Euro-dollar borrowing and outstanding bank-related commercial paper
declined over that period.

But around the June tax date, as business

loan demand picked up, Euro-dollar borrowings of banks began to expand
once more, and CD's were issued in volume--particularly by the large
New York City and Chicago banks.

There are reports that regional

banks have experienced difficulty in placing their CD's, but at this
writing the staff has been unable to confirm the rumors.

Through the

month, foreign official institutions and foreign commercial banks purchased a sizeable volume of CD's.

Despite the pick up after mid-month,

the weakness in late May and early June resulted in a monthly average
decline of non-deposit sources of funds in June, mostly associated

II - 7

MONETARY AGGREGATES
(Seasonally adjusted changes)
1973
QIV

QII

1974
Apr.

May

June p

Per cent at annual rates
M 1 (Currency plus private
demand deposits)

7.1

6.7

8.3

4.7

'6.9

11.0

9.9

7.7

8.2

5.3

9.5

M3 (M2 plus time and savings
deposits at mutual savings
banks and S&L's)

9.8

9.4

6.6

7.5

4.4

7.8

Adjusted bank credit proxy

3.3

8.5

21.0

31.6

16.8

13.6

6.1

15.6

23.6

30.8

22.9

15.8

12.6

12.5

8.5

8.1

5.8

11.5

11.0

12.7

-. 2

-. 4

-5.6

5.2

M 2 (M1 plus commercial bank
time and savings deposits
other than large CD's)

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

Total
Other than large
CD's
Other than all
large time
deposits 1/

(Billions of dollars

Memoranda:
a.
b.
c.

1/
2/

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

-1.3

-. 4
1.6
.4

-. 7

-. 1

5.2

7.7

5.8

2.2

1.0

1.1

-. 5

Staff estimates.
Change in average levels month-to-month or average monthly change for
the quarter, measured from last month in quarter to last month in
quarter, not annualized.

II - 8

with reduced Euro-dollar borrowing, and growth of CD's was considerably
less on average than in April and May.
Bank credit.

Total loans and investments at commercial banks

in the month of June as a whole expanded considerably less than in the
prior three months.

Enlarged purchases of securities accompanied the

deceleration of loan growth.

Municipal bonds were added to bank port-

folios during the month, with New York City banks being major purchasers of large local issues, and banks generally bought a substantial part of new Federal agency offerings (included in other securities)
at mid-month.
The monthly bank credit statistics mask the sharp pick up
in business loan expansion between mid-June and early July that offset
weaker business loan expansion early in the month.

Most of the strength

in loans after mid-month occurred at large New York City and Chicago
banks, and it appears that many of the borrowers were diverted not
only from commercial paper but also from capital markets where a
large volume of issues were postponed, cancelled, or reduced.

The

heavy borrowing at large banks took place against a backdrop of continued tightening in bank lending terms and commitments policy and
continued large aggregate financing needs of both financial and nonfinancial corporations.
The composition of business borrowing at large banks in
June was less concentrated in a few industries than in May when
public utilities, construction companies, and oil companies accounted
for almost all the loan growth.

The business loan growth in June was

broadly spread among public utilities, textile firms, metal fabricating

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

QxI

1974
1974
Apr.

May

June

15,9

11.5

16.0

10.2

7.8

-25.5

25.8

6.4

10.7

17.6

6.8

9.1

3.6

9.9

13.4

7.1

17.4

12.7

20.1

11.5

6.2

4.6
15.9
10.1

22.2
12.2
5.4

23.0
12.2
3.9

34.4
11.9
5.9

20.9
13.7
2.9

12.3
10.7
2.9

1973
1973
QIV
Total loans and investments 2/
U.S. Treasury securities
Other securities
Total loans 2 /
Business loans 2/
Real estate loans
Consumer loans

6,3

(Average monthly change,
of dollars)

8.5

billions

Memorandum:
Loans to nonbank
financial institutions
1/
2/

-.3

1.5

1.4

-1.5

Last-Wednesday-of-month series except for June and December, which are
adjusted to the last business day of the month.
Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.

firms, chemical and rubber companies, and trade concerns.

Loans to

foreign businesses were also substantial, particularly in San Francisco
and New York.
Loans to nonbank financial institutions rose less than seasonally
in June after showing substantial increases in April and May.

The June

decline, however, may be more apparent than real, since the seasonal
factor anticipates a large shifting from the commercial paper market to
bank loans as the holders' proceeds of maturing paper are used for midmonth tax payments.

Many of the nonprime finance companies and REIT's

- 10

were already out of the commercial paper market when June began,

and

the volume of outstanding directly-placed paper was unchanged in June.
The seasonally adjusted decline in bank lending to nonbank financial
institutions thus reflects developments

in previous months.

COMMERCIAL PAPER
(Seasonally adjusted, billions of dollars)

1974

Outstanding

Monthly or average monthly change2/

QI
Total commercial 1/
paper outstanding

1.0

QIIe

April

May

June e

June 28,

1974 e/

1.1

45.8

.4
.6

.3
--

.8
-,8

.3
.8

-. 1
--

7.0
38.8

Dealer-placed

-. 2

13.7

Directly-placed

-. 1

-. 6

25.1

Bank-related
Nonbank-related

1/ Seasonally adjusted figures are unavailable for bank-related paper.
The unadjusted data for bank-related paper are combined with
seasonally adjusted nonbank-related data to obtain the total for
commercial paper outstanding.

2/ Changes shown are changes in levels end-of-month to end-of-month

or average monthly change for the quarter, measured from end-ofmonth in quarter to end-of-month in quarter, not annualized.
Estimated.

As noted earlier,
quality conscious,
June.

the commercial paper market remains highly

and commercial paper outstanding showed no growth in

Dealer-placed paper by prime borrowers, however, had been quite

strong until late in

the month,

at which time these borrowers apparent-

ly shifted bank to banks as the commercial paper rates rose relative
to the lagging prime rate.

Over the month as a whole,

total short-

term business credit expansion--as measured by the sum of business
loans and dealer-placed commercial paper--moderated considerably to the
lowest rate of growth of the year.

II - 11

RATE SPREADS AND CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER
(Amounts in billions of dollars, seasonally adjusted monthly changes)

Prime rate
Business
less 30-59
loans
Dealer
day commercial
at all
placed
paper rate
commercial commercial
(per cent)
banks 1/
paper 2/

Total

Annual
rate of
change in
total
(per cent)

Average monthly changes
1973--QII
QIII
QIV

----

2.2
2.1
.6

.1
.1
1.1

2.3
2.2
1.7

18.1
16.1
12.3

1974--QI
QII e/

---

2.9
3.2

.4
.1

3.3
3.4

23.5
22.4

-. 90
-. 93
-.40

3.3
2.6
.3

-. 1
-. 5
.8

3.2
2.1
1.1

24.2
15.5
8.0

Oct.
Nov.
Dec.

+.52
+.38
-. 04

-. 1
1.2
.7

2.4
1.0
-. 1

2.3
2.2
.6

16.7
15.7
4.2

1974--Jan.
Feb.
Mar.

+.42
+.85
-. 09

2.0
1.2
5.6

1.6
1.7
-2.1

3.6
2.9
3.5

25.3
20.0
23.7

-. 08
+.39
+.38

4.8
3.0
1.8

-. 1
.5
--

4.7
3.5
1.8

31.2
22.7
12.1

1973--July
Aug.
Sept.

Apr.
May
June e/
Weekly Pattern:
1974--May
5
8
15
22
29
June

5
12
19
26

July
1/
2/
e/

-. 30
-. 15
+.13
+.50
+1.09
+.95
+.73
+.28
+.08
-.23

...........
........
. r . .
~~~~~ ~~~
+~
r
I
........................................
...................................
....
.................................
,.
....
. ' ' 'r........................................
........................................
........................................
................................
.
..
..............................
-r
......................
.....
........
.. ........
.. ,
r
..........
.......
.
........................................
'
.
..............................
............
,...........................
........................................
..................................
....
............
,...........................
........
,,,.,,,,,,,,......,.............
........................................
.........
,....,...,.....................
........................................
............
,...........................
.. ,,,,,,,,,,,,,,,,,,.........,..........
...............................
..
................................
...
............
,...........................
.........................
,..............
.........
........
.
.............................
.
r
........................................
........................................
.~~~~~~~
~~~~
~

rr .

.... .. r .~~ ~.

Wednesday-of-month data
Changes are based on last
for outstanding amounts of loans sold to affiliates.
Measured from end-of-month to end-of-month.
Estimated.

and are adjusted

II - 12

Nonbank financial intermediaries.

Deposit growth at S&Ls

and MSBs during the second quarter is estimated to have been relatively
weak, as in the summer of 1973.

At both institutions deposit growth

was stronger in June than during the first two months of the quarter.
June experience at S&Ls showed moderate inflows partially offset by
deposit losses in the last 10 days, followed by an estimated $2.7
billion in interest credited at the end of the month.

Interest

credited also bolstered MSB deposits in June, but these institutions
had deposit losses (exclusive of interest) throughout the month.
During the 3-grace days at the end of the month, a sample of large New
York City MSBs had net deposit losses of $143 million--only moderately
larger than in other recent years.

However, more recent data for

these New York City MSBs indicate they experienced heavy withdrawal
pressures in early July.

On just the first day of the month these

large MSBs had a net loss of $75 million, as compared with a loss of
$89 million during the first 5 business days of July a year ago.
during the first 5 days of July 1974 totaled $171 million.

Losses

II - 13
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)

Mutual
savings banks
1973 - QI

12.3
11.4
4.9
9.3

7.0

QII
QIII
QIV

7.1
1.3
5.1

Both
10.7
10.1

3.8
8.1

QII e/

1.0

10.1
5.5

4.0

April
May E/
June e/

- .1
.2
5.0

4.8
3.0
8.5

3.3
2.2
7.5

1974 - QI

p/
e/

Savings
and loan
loan
ings and
a ssociations

5.2

8.7

Preliminary.
Estimated on the basis of sample data.

The net increase in FHLB advances during June was approximately
$800 million, about the same as in May.

Over half of this increase

was attributable to advances taken down under the 8-1/2 per cent
special commitment program instituted last fall, leaving about $650
million of such commitments outstanding at the end of June.

The

remaining $400 million of regular advances and advances given out
under other special programs in June were available only to those S&Ls
that had reduced their liquidity to the 6 per cent level--a requirement imposed by all District FHLBanks in mid-May in order to allocate
funds to those members who demonstrated need.

In early July, the

demand for advances continued strong and net advances accelerated to
a pace of about $75 million per day.

II - 14

Long-term securities markets. Corporate and municipal yields
have risen about 60 basis points in the last four weeks, while the rise
in long-term Governments has been substantially less.

The market has

been dominated by a preference for quality, and several utilities have
been forced to take new tacks to obtain needed financing.

Some have

come to market with 10-year call protection and strict sinking fund
requirements--provisions typically found only on industrial issues.
Others have shortened the maturity of their issues to the 5 to 8 year
range to take advantage of favorable yield spreads and, more importantly,
to tap a market where there is currently substantial demand by individual
investors.

The yield spread between different rating categories has

been widening, and investors have become increasingly wary of the
verdicts rendered by rating agencies.

In some cases, bonds with the

same rating have differed in yield by as much as 80 basis points.
Several poorly priced issues were recently freed from syndicate restrictions only one or two days after offering, and dealer positions in the
corporate and Government markets are especially light.
Following a short rally in the beginning of June, stock
prices fell sharply in the last three weeks of the month and early July.
While the Dow-Jones Industrials fell about 8 per cent, other more
broadly based indices fell by even greater amounts to levels last seen
in

1970.

The decline was led by bank stocks, as investors became

increasingly concerned about the adequacy of bank capital,
of loans,

especially to REITS,

the quality

and particular incidents such as the

problems of Franklin National and the closing of Bankhaus Herstatt in
Cologne.

II - 15

SELECTED LONG-TERM INTEREST RATES
New Aaa
utility
bonds 1/

Recently offered
Aaa utility
bonds 1/

Long-term
State and
local bonds 2

U.S.Government
bonds (10-year
constant maturity)

1970 - High
Low

9.43 (6/19)
7.72 (12/11)

9.20 (6/26)
8.16 (12/18)

7.12 (5/28)
5.33 (12/10)

8.06 (5/29)
6.29 (12/18)

1971 - High
Low

8.26 (7/30)
7.02 (2/5)

8.23 (1/1)

6.23 (6/24)

6.89 (7/20)

7.17 (12/31)

4.97 (10/21)

5.87 (1/14)

1972 - High

7.60 (4/21)
6.99 (11/24)

7.49 (4/21)

5.54 (4/13)

7.15 (12/1)

4.96 (12/7)

6.58 (9/27)
5.87 (1/14)

1973 - High
Low

8.52 (8/10)

8.32 (8/10)

5.59 (8/3)

7.55 (8/10)

7.29 (1/12)

7.28 (1/5)

4.99 (10/11)

6.42 (1/3)

1974 - High
Low

9.50 (6/28)
8.05 (2/6)

9.78 (7/5)
8.13 (1/4)

6.64 (7/5)

7.66 (5/10)
6.93 (2/15)

June

9.23
9.28
9.49
9.50

9.14
9.18
9.45
9.65

6.01
6.04
6.13
6.33

7.51
7.49
7.53
7.54

9.78p

6.64

7.65p

Low

14
21
28
July
1/
2/
2/

5.16 (2/7)

FRB series.
Bond Buyer.
Preliminary.

The volume of corporate security offerings

in June was sub-

stantially less than previously expected as the decline in bond and
stock prices precipitated about $900 million of postponements, cancellations and reductions in size of several issues, mostly by utilities
and financial institutions.
demand for electricity,

Citing financial conditions,

reduced

and other unfavorable factors, several utilities

have recently announced reductions in planned capital expenditures.

II - 16

Corporate financing in July is expected to be unseasonably
heavy although the amount is

particularly uncertain at this time.

postponement activity of late June has continued in July.

The

The calendar

includes over $1 billion of long-term issues by Citicorp and Chase
Manhattan specifically designed to attract individual investors instead
of the institutional buyers which normally dominate the bond market.
The interest rate on the issues will change every six months,

and will

be one percentage point above the average of the 3-month Treasury bill
rate in the first three bill auctions the month before the interest payment date.

Also, the investor has the option, on each interest payment

date, of redeeming the issues at par.

If the issues are successful,

other institutions may try this form of financing.

On the other hand,

if they are cancelled because of political or regulatory pressures,
several other nonbank companies that are registered for traditional bond
financing but do not have definite offering dates could jump in to fill
some of the resulting void in the market.
schedulings,

Given current and expected

the August volume of offerings will be slightly less than

July, although still quite large for this month.

CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1973
Year
Corporate securities Total

1974
QI

QII e/

June e/

July f/

Aug.

2,779

3,066

3,122

2,960

3,500

2,950

Public bonds
Privately placed bonds
Stock

1,125
725
929

1,939
534
593

2,200
467
455

2,000
500
460

2,400
400
700

2,000
400
550

State and local government
securities

1,942

2,037

2,133

2,000

1,900

1,800

e/
f/

Estimated.
Forecast.

- 17

The volume of municipal offerings is expected to decline
slightly in July and August.

Several municipal governments have also

recently postponed scheduled financial offerings citing unfavorable market conditions and, in some cases, statutory interest rate ceilings.
Some units apparently have chosen to increase their issuance of shortterm notes as a means of temporary financing.

The volume of gross new

issues of tax-exempt short-term notes rose substantially in June, and is
expected to remain high in the near term.
Consumer credit.

Total consumer credit outstanding rose $19.7

billion in May, seasonally adjusted annual rate.
at a rate of $18.0 billion.

Growth in April was

While the gains during the first two months

of the second quarter represent a substantial acceleration from the
first quarter rate of $8.2 billion, the rate continues below the $24.1
billion of the second quarter of 1973.
Instalment debt rose at a $15.1 billion seasonally adjusted
annual rate in May compared with $13.8 billion in April.

The modest

increase resulted from a larger advance in automobile credit and the
second consecutive monthly record in home improvement loans.

Growth in

"other consumer goods" credit and personal loans remained at about the
April rate.
Both extensions and repayments of instalment credit reached
new highs in May.

Extensions were at record levels

of instalment credit except automobiles.
slightly in April after successive
quarter, rebounded sharply in May.

Repayments,

for all categories
which had eased

highs in each month of the first

II - 18

CONSUMER INSTALMENT CREDIT
Credit volume 1/
Net change
in
Repayments
Extensions
outstandings

Period

1973 - QI
QII
QIII
QIV
1974 - QI

1/
2/

Finance rates 2/
New car
loans

23.7
20.2
21.0
15.3

162.4
164.2
170.1
164.4

138.4
144.1
149.1
149.1

11.87
11.91
12.14
12.39

8.8

164.3

155.5

12.34

12.28
156.3
170.1
13.8
April
12.36
160.9
176.0
15.1
May
Billions of dollars, seasonally adjusted annual rates.
Per cent per annum, on contracts purchased by major auto finance companies.

Although extensions of automobile credit are still running
somewhat below the rate that prevailed throughout most of 1973,

the

decline in credit extensions this spring has not matched the decline in
unit sales.

The number of new car sales on credit as a proportion of

total new car sales has been relatively stable, but average contract
size has been increasing.

This increase reflects the leveling in the

proportion of small car sales, higher prices on all models,
finance rates.

and rising

In May, the average amount financed on new car contracts

purchased from retail dealers by finance companies reached $3,531, an
increase of $50 from April and nearly $200 from December.

Finance

charges are adding to the burden in two ways--rates have turned up again
after declining during the first quarter, and contract maturities are being extended.

At finance companies,

the weighted average maturity of new

car contracts is 35.6 months with 6 per cent of all contracts having
maturities in excess of 36 months.

At commercial banks, more than 7

per cent of the contracts now have maturities over 36 months.

II - 19

Short-term interest rates.

At the time of the June FOMC

meeting, most short-term interest rates had resumed their upward climb,
after edging down somewhat in late May.

Since that meeting, most private

short-term rates have risen substantially further to new historical
highs, while, in sharp contrast, Treasury bill rates have changed
much less, with rates on shorter-term bills actually declining.
Much of the recent rise in private short-term rates has been
the usual lagged response to movements in

the Federal funds rate, which

rose toward 12 per cent just prior to the June meeting and has moved
considerably higher since.

On most days recently, the daily effective

Federal funds rate has been above 13 per cent, reaching a record high of
14.33 on July 1.
the surge in

An additional source of upward rate pressure has been

short-term business credit demands,

which have been bolstered

recently by borrowers waiting for conditions to improve in the bond
market.

Moreover, money market pressures continue to be greatly aggravated

by the strong investor preference for top quality instruments.
are widespread reports,
borrowers,

REITs,

for example,

There

that less than prime nonfinancial

and some regional bank holding companies are encount-

ering progressively greater difficulties in

raising funds in

the

commercial paper market.
As a result of such pressures, record rate levels have been
reached in the markets for commercial paper, CD's, and bankers acceptances--in the neighborhood of 12 per cent and above.

Similarly, the

prime rate has generally risen to 12 per cent, with a few banks moving
further to 12-1/4 per cent.

II - 20

In the Treasury bill market, most rates have increased
relatively little

at all, thus leading to a further increase in rate

spreads between bills and other money market instruments.

The Desk

bought over $1.2 billion (net) of bills for foreign central banks in
June, including some investment of oil proceeds by a Mid-east country.
Noncompetitive tenders in the weekly bill auctions have continued to be
unusually large, and there was some reinvestment demand by holders of
$4.5 billion of maturing June TABs,
were turned in for taxes.
strong demands,

dealer bill

of which only about $.8 billion

Against this background of exceptionally
holdings have decreased still

further and

have been in a net short position on most days since the last meeting.
Indeed,

the System has had some technical difficulties in supplying

reserves recently, because of the shortage of bills available for purchase in

the market.
Looking ahead, the Treasury is expected to come to the market

the near term with the first

security offering of the Federal

Financing Bank, amounting perhaps to $1.0 to $1.5 billion.

Further,

currently appears that the Treasury may need to raise about $2.0 to $2.5
billion of new money in late July or early August, perhaps partly in
the form of September TABs.

Over the third quarter as a whole,

the

Treasury and the Financing Bank are expected to raise a total of about
$5.0 billion of new money, about in

line with past average third

quarter borrowings of the Treasury and Budget Agencies combined.

The

calendar of borrowing by the sponsored agencies over the third quarter,

II - 21

however, has risen still further to an exceptionally large amount,
averaging nearly $2.0 billion per month,

so that the combined calendar

of Federal and Federally sponsored borrowing appears to be fairly
heavy.
It should be noted that the Treasury is

reported to be

negotiating with the oil producing countries about channeling a large
share of their proceeds into Treasury issues.
would,

Such foreign purchases

of course, considerably reduce the pressure that the expected

Federal financing needs will place on the Treasury securities market.

II - 22

SELECTED SHORT-TERM INTEREST RATES
(Per cent)
Daily rates
1974

1973

June
Aug.-Sept.
Highs

Feb.
lows

FOMC
June 18

June
25

July
2

July
9

7.63
8.01
8.16

7.34
7.97
8.29

7.56
8.26
8.21

Treasury bills
3-months
6-months
1-year

9.05
9.00
8.50

6.93
6.80
6.37

8.13
8.12
8.13

10.38
10.50
10.50

8.13
7.75
7.50

11.38
11.25
11.00

11.50 12.00 12.13
11.50 12.00 12.13
11.25 11.75 11.88

11.05
11.00

7.85
7.50

11.50
10.88

11.90 12.13 12.38
11.50 11.50 11.88

9.49

7.01

9.05

10.00

8.75

11.50

Commercial Paper
1-month
90-119 days
4-6 months

Large negot. CD's 1/
3-months
6-months
Federal agencies
1-year
Bank prime rate

9.13

1/
2/

Highest quoted new issues.
Average for first six days of the week.

11.85

9.55(7/8)

11.50 11.75-12.00
12.00

Statement week ended
June
June
19
26
Federal funds rate
(weekly average)

9.45

11.97

July
3
13.55

July
10 2/
13.54

II - 23

Mortgage market.
during June and early July.

Mortgage markets tightened somewhat further
While the increases were moderate and

irregular, interest rates on new commitments for home mortgages reached
new highs in both the primary and secondary mortgage markets, and nonrate loan terms continued to become more restrictive.

Seasonally

adjusted new commitments for mortgages at savings and loan associations,
which had declined substantially in May after seven consecutive months
of recovery from last September's low, apparently dropped further in
June as S&L's continued to report funds in short supply in virtually all
of the 12 FHLBank districts.
Average contract interest rates on new commitments for 80
per cent conventional home loans at selected savings and loans tended
higher through July 5 to a level of 9.14 per cent.

This was above pre-

vailing usury ceilings in 16 states and the District of Columbia.

More-

over, mortgage investment generally has remained relatively unattractive
to diversified lenders as yields on new issues of high-grade utility
bonds have held above yields on home mortgages in most areas of the
country, even before allowance for the higher servicing costs associated
with mortgages.

Non-rate loan terms offered on home mortgage commit-

ments also tightened further in June.

Even so, about two-thirds of

S&L's were still offering 90-per cent 25-year financing to eligible
borrowers; this compared with a low of about one-half of the S&L's in
this category last September.

- 24

CONVENTIONAL HOME MORTGAGES
AT 120 S&L's
Average
going rate on
80% loans
(per cent)
1973 - High
Low

8.85 (9/28)
7.43 (1/26, 2/2,

Basis point
change from
month or week
earlier
---

Number of
Spread 1/ Federal Home Loan Bank
districts with funds
(basis
in short supply
points)
107 (9/12)
- 12 (8/8)

12 (Aug.-Sept.)
0 (Jan.-Mar.)

2/9)
1974
Jan.
Feb.
Mar.
Apr.
May

8.52
8.42
8.41
8.73
9.03

- 4
-10
- 1
+32
+30

27
32
-23
-25
- 6

4
0
0
6
12

June

7
14
21
28

9.06
9.11
9.07
9.10

+
+
+

3
5
4
3

-17
-17
-42
-40

11
12
12
11

July

9.14

+ 4

n.a.

Average mortgage return before deducting servicing costs minus average yield
on new issues of Aaa utility bonds paying interest semi-annually and with 5year call protection. Mortgage yields shown may be converted to equivalents
of semi-annual interest investments by adding 16 basis points to the gross
yields between 8.59 and 8.85 per cent, and 17 basis points to yields above this
level.

Offerings in the July 1 FNMA auction of commitments to purchase FHA/VA home mortgages increased substantially from the volume
posted in the June auctions, reflecting renewed expectations among
mortgage bankers that mortgage prices may fall further in

future.

the near

At the same time, the average yield on accepted bids rose by

11 basis points to a new high after leveling off in the first half of
June.

FNMA AUCTION RESULTS
HOME MORTGAGE COMMITMENTS

(in

1973 - High
Low
1974 - Jan. 14
Feb. 11
25

NOTE:

Government-Underwritten
Amount
Yield to
millions of dollars)
FNMA

Offered

Accepted

551 (9/3)

289 (9/3)

Conventional
Amount
(in millions of dollars)
Offered

9.37 (9/17)

171 (8/20)

Yield to
FNMA

Accepted

88 (4/16)

9.68 (9/17)

7 (10/1)

7.84 (1/2)

25 (10/15,
11/26)
40

17 (10/15)

7.69 (1/8)

8.71

8.77

50
58

49
42

8.53
8.43

48
49

48
39

8.69
8.50

9 (10/1)

Mar.

11
25

351
1,154

285
333

8.44
8.62

74
126

50
34

8.47
8.64

Apr.

8
22

1,061
334

267
169

8.95
9.18

164
80

63
41

9.00
9.21

May

6
20

256
218

111
83

9.34
9.48

74
41

30
24

9.44
9.63

June

3
1/

85
39

72
32

9.54
9.54

26
22

21
11

9.70
9.69

July

272

103

9.65

9.76

Average secondary market yields are gross before deduction of the fee of 38 basis points paid
for mortgage servicing. They reflect the average accepted bid yield for home mortgages
assuming a prepayment period of 12 years for 30-year loans, without special adjustment for
FNMA commitment fees and FNMA stock purchase and holding requirements.
Mortgage amounts offered
by bidders relate to total bids received.
The maximum size of competitive offers was $3 million
in all but the March 25 and April 8 auctions when the maximum was suspended.

- 26

Activity under the subsidy programs announced by the Administration in May generally has remained strong.

Through July 5,

the

FHLMC had already issued $2.1 billion in commitments under the program
to purchase up to $3 billion of 8-3/4 per cent conventional new-home
mortgages.

Furthermore, applications to the FHLBanks for the new

subsidized advances have been exceeding the $500 million per month pace
scheduled for the rest of the year.

Some support is also being generated

by the GNMA Tandem Plan, although in June GNMA issued commitments to
purchase below-market-rate mortgages on fewer than 13,000 units--and,
altogether, commitments for only about 100,000 units have been issued
since the first

phase of the program began in

late January.

mentioned by the trade for this relative sluggishness is

One reason

that the low

contract rate on the mortgages involved in the program at a time of
rising market interest rates tends to make the cost of warehousing prohibitive for mortgage originators, despite the potential appeal of such
mortgages to home buyers and builders.
With 8-3/4 per cent FHA/VA mortgages selling at discounts of
more than 5 points, the maximum contract interest rate on Governmentunderwritten mortgages was raised one-quarter percentage point by
administrative action to a record level of 9 per cent, effective July 8.
This was the third such rise since mid-April.
mortgages under GNMA's Tandem Plan, however,

Rates specified for
remain unchanged.

The January 22 plan provides for GNMA purchase of 200,000 new-unit
FHA/VA mortgages which must bear a contract interest rate of 7-3/4
per cent. The supplemental plan announced May 10 provides for purchase of an additional 100,000 mortgages with contract rates of
8 per cent.

II - 27

Federal finance.

The budgetary outlook for fiscal 1975 is

quite tentative at this time because of pending Congressional action
regarding both expenditure and tax programs.

As yet, action has not

been completed on any of the major appropriations bills.

Considerable

debate is expected on the "Oil and Gas Energy Tax Act of 1974".
Although this measure has been approved by the Ways and Means Committee,
floor procedures regarding amendments have not yet been fully determined

(staff projections assume enactment)

Recently, the Ways and Means

Committee rescheduled the target date for completion of its report
on tax reform legislation from June 30 to July 20.

The Congress has

passed the "Congressional Budget and Impoundment Control Act of 1974"
that would affect budgets beginning in fiscal year 1976.

It is

uncertain, however, whether the President will sign the bill because
of its anti-impoundment provisions.
While there has been no official change in the Administration's
budget forecast, the President has stated that an anti-inflation spending
cut of $5 billion has been targeted for the current fiscal year.
However, little information has been provided on where reductions
might take place, and this target could be difficult to achieve
given the level of commitments implied by existing legislation and
court rulings on impoundment.

On the tax side, Secretary Simon re-

ported that the Treasury is currently studying the possibility of a
"balanced tax package" that would provide incentives for business
investment and give tax relief to low-income individuals; he indicated
that some offsetting revenue might be obtained from changing the tax
treatment of capital gains in a way which would "unlock" investors.

- 28

Because of these various uncertainties, the staff has not
changed its $304 billion outlays projection for the new fiscal year.
The receipts estimate, however, has been lowered by $1.1 billion to a
level of $294.9 billion in response to revised income assumptions and
These projections

a lower estimated effective corporate tax rate.
result in a $9.1 billion deficit for fiscal 1975.

For the preceding

fiscal year, preliminary data suggests a deficit of $3.0 billion,
reflecting receipts of $264.5 billion and outlays of $267.5 billion.
On July 1st, the Treasury released a report stating that it
would seek legislation permitting it to invest its tax and loan account
balances in interest-bearing instruments, and directly compensate banks
for the services they render.

In the interim, the Treasury said it

would reduce the level of these balances, and experiment with placing
funds in thirty-day time deposits.

No legislation is required as long

as the funds are kept in the form of deposits.

(A summary of this

report will be presented in an Appendix to the Greenbook Supplement.)
On June 30, the President signed the bill raising the debt ceiling to
$495 billion through March 31.

Originally, the Administration had

requested a $505 billion ceiling through June 30, 1975.

- 29

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues, net
As yet unspecified new
borrowing
Special foreign series
Budget agency transactions
with the public
Net Federal Financing Bank
transactions with the
public
Debt repayment
Plus:

Other net financial sources a/

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

June

July

-3.4
1.6

Sept.

4.5

.8
2.0

.8
--

-2.0

--.8

2,5
--

1.5

-1.0
.2

1.0
-.8

-4.2

-1.4 b/
7.6
2.8P

Level of cash balance,
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

Aug.

30.S
23.3

.9- -1.5
-6.3

-2.6

4.0

-. 9

-3.4

4.9

8.3

4.9

9.8

20.3
26.6

24.0
26.6

Maturing coupon issues
held by public
Net borrowing by government-sponsored agencies

2.9

28.6
24.6

4.4

1.9

1.1

2.0

e--estimated.
a/
Checks outstanding less checks paid and other accrual items.
b/ Reflects assumption of $1.2 billion in deferred receipts from
auction of offshore oil leases.
Actual.
c/

FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)

.R.B.

Staff Estimates

Fiscal 1974 e/ Fiscal 1975 e/ Calendar Years Calendar Quarters
Adm. Est. F.R. Adm. Est. F.R. 1973
1974
1974
5-30-74 Board 5-30-74 Board Actual FRB e/ -I
II
III

Federal Budget

Unadjusted data

Surplus/deficit
Receipts
Outlays

-3.5
266.0
269.5

Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 1/

n.a.
n.a.

Cash operating balance, end of period n.a.
2/
M4emo- :

Sales of financial assets
to the public 3/
V
Borrowing from the public:
Budget agency
Federal Financing Bank
Treasury borrowing, net 5/
Sponsored agency borrowing-

n.a.

n.a.
I; 7
h.a.
13. 6

-3.0

-7.9 -8.6
250.4 280.1
258.3 288.8

Surplus/deficit
Receipts
Expenditures

cule-p~etdn~.-o

Actual

e--projected

-4.9 -6.9 2.7
72.9 66.9 155.1
77.8
73.8 152.4

-9.1
294.9
304.0

3.4
3.4

n.a.
n.a.

-3.9

n.a.

n.e.
n.e.
n.e.

7.9
.7
-.7

10.4
2.6
-4.4

3.4
2.0
1.7

-5.9
-.8
-3.6

6.1
-.6
-.6

6.8 n.e.
2.0 n.e.
-1.9 n.e.

9.2

n.a.

n.e.

10.4

7.8

8.4

9.2

9.8

7.8 n.e.

1.5

n.a.

n.e.

3.6

1.4

.4 n.e.

1.2

n.a. ) n.e.

-.1 ) 5.0

.2)

2.6

1.8 n.e.

2.9

-6.1

3.5

-T

5.9

6.0

5.0 n.e.
3.8 n.e.

267.5

2.3
15.2

n.a.
n.a.

)

n.e.
n.e.

- )

8.1
16,3

5.3
15.8

60.5

67.6

10.3
79.8
69.6

Seasonally adjusted annual rates

-. 6
278.2
278.8

High Efployment surplus/deficit
(NIA basis) 8/

-7.1

-11.4
294.0
305.4

264.5

Natiohal Incbte Sector

Half-Yr.
1975
Jan-June

n.a.

-.26/
278.77'
278.9-

-12.8

304.3
317.1

-11.3,,
.9 -4.0
304.1- 265.0 294.5
315.4 264.0 298.5

.4
n.a.
11.2
stmtdna.-o

n.e.--not estimated

-1.3

3.3
285.6

-2.2 -7.7
-9.3 -12.8
292.2 296.9 303.2 309.4
282.3 294.4 304.6 312.5 322.1

3.0
vilbep-prlmnr

n.a.--not available

1.8

7.6

17.8

p --preliminary

Footnotes continued
1/

Includes such items as deposit fund accounts and clearing accounts.

The sum of sponsored and budget agency debt issues, financial asset sales, and borrowing by
the Federal Financing Bank does not necessarily reflect the volume of debt absorbed by the
public, since both the sponsored and budget agencies acquire a portion of these issues. Most
of the market activities of budget agencies are expected to be handled by the Federal Financing
Bank in fiscal year 1975.

Includes net sales of loans held by the Government National Mortgage Assn., Federal Housing
Adm., and Veterans,Adm. Receipts from these sales are netted against Federal Budget Outlays
shown above.

Budget agencies such as U.S. Postal Service, Export-Import Bank, and Tennessee Valley Authority,
borrow directly from the public or from the Federal Financing Bank. The Federal Financing
Bank in turn borrows from the public or from the Treasury. To avoid double counting only net
borrowing from the public is shown in the table.

Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage
Assn., Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.

Quarterly averages exceed fiscal year total by $1.7 billion for fiscal 1974 and $.6 billion
for fiscal 1975 due to spreading of wage base effect over calendar year.

Fiscal year exceeds quarterly average by $.9 billion due to seasonal adjustment.

Estimated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

CONFIDENTIAL (FR)
7/10/74
III --

T - 1

U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)

1 9 7 3
YEAR
4,543

Goods and services, net 1/
Trade balance 2/
Exports 2/
Imports 2/
Service balance

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other
Nonbank-reported claims -- liquid
"
"
"
other
Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches 3/
Other private foreign
Intl. & regional organizations
Other nonliquid liabilities
Liab. to foreign official reserve agencies

Errors and omissions

1 9 7 4
4Q
2,934

10
2,902

623
602
1,343
101
70,252 18,143 20,211 22,299
-69,629 -17,541 -18,368 -22,196
3,918
1,081
1,591
2,801

Remittances and pensions
Govt. grants & capital, net

U.S. monetary reserves (increase,
Gold stock
Special drawing rights
IMF gold tranche
Convertible currencies

30
1,683

-1,943

-412

-717

-3,472

-883

-1,309

-1.183

-4,728

-7,391

-14.101

-1.629

-4,872
-807
-1,103
-4,773
-841
-1,794

-710
-209
-456
421
-65
-610

12,444

3,571

5,689

886
871
197
106
837
699
(119)
188
-50
675

712
486
368
-184
4.113
3,229
(212)
500
384
194

-1.930

-2 646

2,537
2,758
1,223
70
4.436*
2,978
(309)
1,082
376
1,420

5.095
209

-1,374'
-220'
-525
-647
-183
-472 -2,248
474
-1,571
-2,983
-1,990
-21
-412
98
-765
-881

-13

-15

-993
7,487
8,460

-66
-1,491
-1,570

6,822

1,127
376
16
25
296
4,573
166
4,589
45
(3,381) -1,958)
577
245:
-124
-593
426

-834
-210

-13

-15

-209.

233

<*)

-1

-387

792

2910

1,943
939
-1,627
611
1,106
13L
1,917
-250

2,661
2,982
-959
-179
-1,452

1,044

-2,776

-140'
8,150
8,290

MAY*

-396

-33

APRIL*

1,6361
-63.

-19

2.579
2,209
(1,755)
1l6
254

796
-219

-63
--

-165
-57

BALANCE (deficit -)

Official settlements, S.A.
"
"
, N.S.A.
Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 4/
"
, N.S.A.
Basic balance, S.A.
"
"
, N.S.A.

-5,304
-7,796
-9,740
-744

-520
-498
1,237,

-1,573

-577

-46 -2,311
-3,529
-1,739
-2,850
2,065
2,453

-3,156

1,488.
-869

Monthly, only exports and imports are seasonally adjusted.
Equals "net exports" in the NP, except for latest revisions.
Balance of payments basis which differs a little from Census Basis.
Not seasonally adjusted.
Measured by changes in U.S. monetary reserves, all 'liabilities to foreign official
reserve agencies and liquid liabilities to commercial banks and other foreigners.

III - 1

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

The dollar has appreciated by about 1/2

per cent on a weighted average basis over the past month, to a level
about 2-1/2 per cent above its mid-May low.

This improvement has

occurred despite a probable further deterioration in the trade balance
(already in deficit at an annual rate of $6.8 billion in April-May
combined), and while net private capital flows are still probably tending
to move outward.
Data for bank-reported claims on foreigners showed a jump of
about $3 billion in May (about equally divided between U.S. commercial
banks and agencies and branches of foreign banks) and weekly data for
member banks show some further rise in June.

Banks' liabilities to

foreign commercial banks were also rising, but by lesser amounts.
Foreign dealings in U.S. corporate stocks appear to have turned negative
in May, and a pickup since then seems unlikely.

Finally, some of the

inflows of capital in the first quarter associated with the activities
of the major petroleum companies were probably reversed during the
second quarter to meet payments of taxes and royalties to oil-producing
countries.
In terms of the official settlements balance the United States
had a deficit of about $2 billion in June, and probably over $4 billion
(not seasonally adjusted) for the second quarter as a whole.

However,

this does not reflect to any great extent a buildup of dollar holdings

III - 2

as a result of official intervention in exchange markets to support
the dollar against other major currencies; reserves of the major industrial countries as a group changed very little in June, and rose only
about $1/2 billion during the second quarter.

The main increase in

official dollar holdings in the United States was by other countries -and partial data indicate that most of the gain was by oil producers.
Thus, the placement of funds by these countries has provided considerable support for the U.S. dollar in recent months.

Apart from this

feature, the strength of the dollar in exchange markets probably
reflects the generalized effects on market attitudes of high and

rising interest rates in the United States.
The near-term outlook for economic activity in other industrial
countries (with the exception of Canada) is for continued slow growth
in internal demand, and in some countries for a further slowing in the
rates of growth.

In Japan, France and Italy, policy actions aim at

achieving such a slowdown; in other countries the effects of past
restrictive actions, combined with an erosion in the growth of real
incomes, are acting to depress economic activity.
banking markets may also dampen activity.

Disruptions of

In most countries, exports

are looked to as a major support to economic activity rates, but such

expectations cannot materialize if internal demand remains sluggish
in most industrial countries.

However, with inflation rates remaining

in the two-digit range almost everywhere, except in Germany, Austria
and the Netherlands, policy concerns continue to focus primarily on
reducing inflationary pressures.

III - 3

The outlook for the U.S. balance of payments has not changed
materially; the balance on goods and services is expected to worsen
considerably over the year ahead, with over-all balance and the
strength of the dollar depending largely on the extent to which oilproducing countries place funds in U.S. capital markets, as well as
on the net flow of private capital between the U.S. and other countries.

Foreign exchange markets.

The weighted average exchange

value of the dollar has increased by 1/2 per cent from its level of
four weeks ago, and currently stands 6 per cent above its value of
last October and 6 per cent below its high of late January.
The dominant feature of exchange markets during the past
month has been the sharp drop in trading activity following the June 26

foreign exchange related failure of the Herstatt Bank in Germany.
Uncertainty created by the Herstatt failure caused an immediate drop
in the volume of trading on the New York and European foreign exchange
markets to below half of its normal level.

Although trading activity

has increased somewhat so far in July, it remains well below normal.
The mark-dollar exchange rate experienced conflicting pressures
over the past month.

The strong upward movement of U.S. interest rates

during the period and the Bundesbank's move to provide increased rediscount assistance to the German banking system put upward exchange
rate pressure on the dollar relative to the mark.

Pressure in the

opposite direction was generated by the swing into substantial deficit

III - 4

of the May U.S.

trade balance and the further increase in the May German

trade surplus to 4.9 billion marks.

On balance,

the dollar has shown a

net gain of 1-1/2 per cent against the mark since mid-June, moving up
by smaller amounts against the other snake currencies and the Swiss franc.
During the last two weeks of June the Bundesbank made intervention sales
of $130 million and the System purchased marks in the New York market and
made swap repayments totaling $106 million equivalent.
The dollar has depreciated by 1-1/2 per cent against the French
franc and lira over the past month.

The rise in the franc was stimulated

by a tightening of the French money market and the announcement of a $5
billion export agreement with Iran.

The increased demand for the lira

followed the announcement of stringent anti-inflation measures by the
Italian government.

The central banks of France and Italy both made inter-

vention purchases totaling about $200 million in the last two weeks of
June.

The Italian intervention purchases partially balance intervention

sales by the Bank of Italy totaling $500 million earlier in June.
In other intervention activity, the Swiss National Bank made
substantial swap dollar purchases to provide quarter-end liquidity to the
Swiss banking system while the Bank of England engaged in sales of dollars
on a swap basis in order to reduce excess liquidity in the British money
market.

The Bank of Canada made small net sales of dollars during the

period to moderate an easing of the Canadian dollar rate.
The gold price dropped sharply from a high of $160 on June 14
to a low of $129 on July 4, then made an equally sharp recovery to a current
level above $140.

III

Euro-dollar market.

- 5

Euro-dollar interest rates, along with U.S.

interest rates, have risen to record highs in recent weeks.

In the week

ended July 10 the overnight deposit rate averaged 13-7/16 per cent, up
2-1/4 percentage points from four weeks earlier.
deposit rates averaged 13-13/16 per cent in

Three-month Euro-dollar

the week ended July 10, also

an increase of 2-1/4 percentage points in four weeks.
U.S. banks' liabilities to their foreign branches, after declining
sharply in the first half of June, turned up, rising by nearly $1 billion
in the two weeks to July 5 to a level of $3.6 billion.
Apart from the influence of U.S. interest rate movements, and
continued strong loan demand in the Euro-markets, one additional factor
putting upward pressure on Euro-dollar rates in recent weeks has reportedly
been an increase in the "risk" premium demanded by investors in that market,
particularly arising from the Franklin National and Herstatt troubles,
and in general from the widespread talk about the Euro-markets lacking a
lender of last resort, etc.

Presumably it is this increased risk premium

which accounts for the wide differential (1-3/4 per cent, or so) which
has opened up between U.S. CD rates and three-month Euro-dollar deposits.
A wider differential between Euro-dollar loan rates and U.S.
bank loan rates has also developed in recent weeks as can be seen in Table 2.
This reflects both a wider differential on deposit rates and
a wider spread between deposit and loan rates in the Euro-market, the
latter emerging as the lending banks themselves have perceived greater

III - 6

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES

Federal

(3)
Differential

(4)
3-month
Euro-$

60-89 day

(6)
Differential

Euro-$

Funds

(1)-(2)(*)

Deposit

CD rate

(4)-(5)(*)

1974-Apr.
May

9.73
10.94

10.47
11.32

-0.74 ( 0.11)
-0.38 ( 0.57)

10.48
11.70

10.05 0.43 (0.47)
10.88 0.82 (0.89)

June

11.40

11.75

-0.35 ( 0.64)

12.04

11.08

0.96 (1.04)

1974-June

11.24
11.13
11,43
11.67
12.43
13.42

11.44
11.60
11.85
11.96
13.55
13.55

-0.20
-0.47
-0.42
-0.29
-1.12
-0.13

11.86
11.50
11.90
12.68
13.41
13,80

10.75
10.75
11.13
11.50
11.63
11.63

1.11
0.75
0.77
1.18
1.78
2.17

Average for
month or
week ending

(1)
Overnight

Wednesday

5
12
19
26
July 3
10/

(2)

( 0.78)
( 0.50)
( 0.57)
( 0.72)
(-0.04)
( 1.04)

(5)

(1.21)
(0.81)
(0.84)
(1.28)
(1.93)
(2.36)

*_ Differentials in parentheses are adjusted for the cost of required reserves.
p/ Preliminary
SELECTED EURO-DOLLAR AND U.S. COSTS FOR PRIME BORROWERS
(1974; Friday dates)
June 28
14.13

June 14
12.56
11.38

June 21

11.50
13.53
14.38

11.75

(1) - (2)

1.18
1.06

1.44
1.44
-0.59
-1.44

2.00

(1) - (3a)
(1) - (3b)
(1) - (3c)

1) 3-mo. Euro-$ loan!/
2) 90-119 day com'l. paper- /
3) U.S. bank loan:
a) predominant prime rate
b) with 15% comp. bal's.
c) with 207. comp. bal's.
Differentials:

-0.97
-1.82

12.94
11.50

3/4 per cent over deposit bid rate in June.
offer rate plus 1/8 per cent.
prime rate adjusted for compensating balances.

12.13

13.82
14.69
2.38

0.31
-0.56

July 5
14.50
12.13
12.00
14,12
15.00
2.37
2.50
0.38
-0.56

III - 7

risks, perhaps related to problems of maturity structure of their assets
and liabilities and/or perhaps to growing concern over the creditworthiness
of borrowers.

Arrangements for publicized medium-term Euro-currency loans
came to $2.1 billion in June, according to preliminary World Bank estimates,
off from the revised level of $2.8 billion in May.

For the second quarter,

publicized arrangements averaged $2.6 billion per month, down sharply from
the $4.6 billion monthly average for the first quarter.

In June, loans

of $100 million or more were arranged by the Royal Dutch Shell group ($400
million), Mexicana de Cobre S.A., ($300 million), the Bank of Greece ($200
million), the Government of Brazil ($150 million), the Gabonese Railways
($150 million), the Central Bank of the Philippines ($150 million),

the

Government of Argentina ($100 million), and the Xerox Corporation ($100
million).
U.S. balance of payments.

Over-all indicators of the U.S.

international position showed mixed movements in June.

The dollar

appreciated slightly, on average, against the major foreign currencies,
following a steady depreciation since January. However, based on very
preliminary data it appears that the official settlements balance was
in substantial deficit in June -- over $2 billion (not seasonally
adjusted, not at annual rate).

For the second quarter this balance is

estimated to have been in deficit by around $4-1/2 billion (seasonally
adjusted, not at annual rate).

This compares with surpluses of $1 billion

in the first quarter and $2-3/4 billion in the fourth quarter of 1973.

III - 8

U.S. liabilities to official institutions of the major oil-exporting
countries rose by about $1 billion in the first quarter and probably by
more than $2 billion in the second.
There is very little information available on the components of
the balance of payments for the second quarter, but information which is
available for April-May indicates that the deterioration in the official
settlements balance stems, at least in part, from a large trade deficit
and a further increase in bank-reported net capital outflows.

For April

and May combined the trade deficit was over $1 billion (seasonally adjusted,
not at annual rate), compared with a small surplus in the first quarter;
the deterioration reflects a sharp rise in the price of imported oil.
Bank-reported capital flows for April-May show a net outflow of $1-3/4
billion (not seasonally adjusted, not at annual rate), compared with about
$3/4 billion for the entire first quarter.

Bank-reported claims on

foreigners in April and May combined increased by $4-1/2 billion, with
almost $3 billion reported by U.S.

commercial banks and the remainder by

U.S. agencies and branches of foreign banks.

For the same period liquid

liabilities to private foreigners increased $2-3/4 billion, of which
$1/2 billion was reported by U.S. agencies and branches of foreign banks.
Private securities transactions resulted in a small net outflow
in April and May together,
quarter.

compared to a small net inflow in the first

Foreigners sold, net, a small amount of U.S. stocks in May and

reduced their net purchases of bonds.

U.S. purchases of new foreign

III - 9

bond issues also dropped in May; issues by countries previously affected
by the Interest Equalization Tax continued to be small.
Complete information on the U.S. balance of payments for the
first quarter of this year indicates that much of the change from the
fourth quarter resulted from petroleum-related transactions.

The removal

of controls on capital flows, both by the United States and foreign
countries, was also a significant element.

The total balance on goods and

services in the first quarter was essentially unchanged from the fourth
quarter, holding at the large surplus of $2.9 billion (seasonally adjusted,
not at an annual rate).

However, the first quarter results were affected

favorably by a steep and probably temporary rise in the reported foreign
earnings of U.S. oil companies.

The trade balance showed an equal and

offsetting decline.
The basic balance (sum of current account and long-term capital
transactions) was in surplus by over $2 billion in the first quarter
compared with a deficit of $1/2 billion in the fourth quarter of 1973.
This shift reflected a substantial decline in U.S. direct investments
abroad and a rise in foreign direct investments in the United States.
The favorable changes in these accounts are also probably temporary,
reflecting delays by U.S. oil companies in payments to their foreign
affiliates as well as an inflow representing unpaid dividends to Saudi Arabia
on its share of petroleum earnings.

To an extent, which will not be known

for some time, these transactions that strengthened the international
accounts in the first quarter will be unwound in the second and subsequent
quarters.

III - 10

U.S. merchandise trade.

In May, the U.S. trade balance

deteriorated sharply, registering a deficit of $11.9 billion at an
annual rate (balance-of-payments basis) as exports declined by 8 percent,
while imports rose by more than 2 percent.

For April-May combined the

trade balance was in deficit by $6.8 billion at an annual rate, as
compared to a small surplus in the first quarter.

The dominant factor

in the worsening of the trade balance between the first quarter and
April-May was the more than $9 billion increase in fuel imports.
was also a dip in agricultural exports.

There

The trade balance, excluding

agricultural exports and fuel imports, would have shown a more than
$3 billion improvement (at an annual rate) in April-May.

U.S. MERCHANDISE TRADE, BALANCE OF PAYMENTS BASIS
(billions of dollars, seasonally adjusted annual rates)
Current dollars
1974
1973
3Q
4Q
1Q
Apr.-May

EXPORTS

Constant (1967) dollars
1973
1974
3Q
4Q
1Q
Apr.-May

72.6

80.8

89.2

93.8

51.5

53.7

54.8

56.1

19.0
53.5

21.2
59.7

23.6
65.6

22.6
71.2

10.2
41.3

10.4
43.6

10.4
44.7

9.8
47.0

IMPORTS

70.2

75.5

88.8

100.6

46.1

45.6

46.1

46.4

Fuels

9.0

11.5

20.5

29.9

6.4

6.2

5.2

Nonfuels

61.2

63.9

68.3

70.7

39.8

39.4

41.0

39.4

TOTAL BALANCE

+2.4

+5.4

+0.4

-6.8

+5.4

+8.1

+8.7

+9.8

BALANCE excl. -7.7 -4.2
fuel imp. & agr. exp.

-2.7

+0.5

+1.5

+4.2

+3.7

+7.6

Agric.
Nonagric.

5.9

III - 11

By country, the U.S. trade balance with the less-developed
petroleum supplying countries deteriorated sharply, even though U.S.
exports to those countries rose appreciably.

The trade balance with other

developing countries improved slightly or remained steady, as the increase
in exports and imports was evenly matched.

However, the U.S. trade

balance with the developed countries declined in April-May; sharp increases
in imports from Germany and Japan combined with a flattening out in
exports to both of those countries were responsible for most of that
decline.
U.S. exports for April-May were at an annual rate of $93.8
billion (balance of payments basis),5 percent above their first quarter
level.

The increase resulted entirely from larger shipments of non-

agricultural products; exports of agricultural goods declined by nearly
$1 billion from the record first quarter rate.
The decline in the value of agricultural exports -- the first
decline since the second quarter of 1972 -- stemmed from a drop in
volume, particularly wheat, while the export unit value showed a small
increase.

However, in May, export prices of many commodities such as

wheat, corn, rice, and soybeans levelled off or declined.

With the

increased supply of agricultural goods in world markets, U.S. agricultural
export- prices may decline further in coming months.
The value of U.S. exports of nonagricultural goods increased
in April-May in all major categories, except civilian aircraft.

Increased

III - 12

shipments of both machinery and industrial supplies accounted for most
of the gain.

While the increase in the value of machinery exports was

in volume, the advance in the value of industrial supplies was largely
the effect of higher prices.

With the weakening in world demand for

industrial supplies, as evidenced by recent declines in prices of metals
in commodity markets, the rate of increase in prices of materials exports
may slacken.

On the other hand, foreign orders for U.S. durable equip-

ment (excluding aircraft) continued to rise in April-May suggesting
continued strength in such exports.
U.S. imports for April-May were at annual rate of $100.6 billion
(balance of payments basis), an increase of nearly $12 billion from the
first quarter rate.

The 45 percent jump in the value of fuel imports in

April-May was responsible for most of the gain in the value of total
imports.

The average price of oil imports was $11.61 per barrel in

April-May compared with $9.10 in the first quarter.

With the lifting of

the oil embargo in late March, the volume of oil imports averaged more
than 6.5 million barrels a day in April-May, as compared with an average
of 5.9 million barrels per day in the first three months of the year,
and it is expected that the volume of oil imports will average about
7 million barrels a day during the rest of the year.
The somewhat higher value of nonfuel imports in April-May
resulted entirely from higher prices; volumes declined.

Decreases in

the volume of food imports (particularly coffee, cocoa, and meat) and

III - 13

automotive vehicles from Canada were responsible for most of the decline
in volume.

With the continued sluggishness in U.S. activity, the volume

of imports of industrial supplies has remained virtually flat.

In addition,

the April-May volume of imports of consumer goods (excluding cars and
food) rose only slightly above the first quarter level. So far this year,
the monthly volume of consumer goods imports has continued below the
average monthly levels of 1972 and 1973, probably reflecting in large
part the effect of the exchange rate realignments begun in 1971.
In contrast, the volume of imports of foreign-type cars in
April-May continued to increase -- more than 20 percent above the
already high first quarter rate.

In every month this year, imports

have been far in excess of U.S. sales, and some foreign car suppliers
have announced plans to cut back their deliveries to the United States
in order to reduce the current high stock-sale ratio.

III - 14
At

Economic activity in major foreign industrial countries.
the recent meeting of the OECD's Economic Policy Committee in Paris,

was clear that the main policy concern of the industrial countries
was the need to bring the rapid rise in the level of prices under control.

The consensus was that the series of restrictive policy

measures taken in most countries over recent months has been appropriate.
However, opinions varied as to whether actions taken so far would be
sufficient to achieve the desired moderation in price increases,
whether further restriction would be necessary, and at what point
relaxation of these measures would be appropriate.
are facing the same policy dilemma:

Most authorities

will restrictive actions create

a downturn leading to possible "stag-" or "slump-flation," or are
inflationary pressures still so tenacious that, despite the downward
risks, continued or additional restriction is necessary?

A further

consideration is that restrictive policy measures are being taken
simultaneously in many countries and could, therefore, have a
cumulative effect on economic activity.
The authorities' present concern with the need for restriction
represents a change from early this year when the major concern for
many countries was the possibility of a world recession in the wake
of the oil crisis.

This fear receded when countries came out of the

oil-embargo period with a somewhat smaller decline in economic
activity, but with much more rapid price increases, than had been

III - 15

expected.

This situation led almost all governments to tighten monetary

policies, and in most cases also to tighten fiscal policies.

Consumer

prices in all of the industrial countries, with the exception of Austria,
Germany, and the Netherlands, are now rising at year-over-year rates of
from 10 to over 20 per cent, and there is little hope that these rates
of increase will decline significantly before the end of the year.
Inflationary pressures are also being aggravated as wage earners attempt
to protect their real earnings by demanding large catch-up wage settlements.

Although excess demand is not a general problem any longer,

most authorities are relying on traditional demand management instruments in their attempts to control inflation.

Except in a few

countries, such as Austria, where price and wage controls have worked
fairly well, it appears that most policy makers have become disenchanted with the use of these auxiliary policy instruments; thus,
they are now willing to accept the risks of depressing demand levels
more than they might otherwise think desirable.
In all of the major industrial countries except Canada, a
slowdown in rates of growth of real GNP began in the third or fourth
Given the further slowdown --

quarter of 1973.

(See table.)

actual decline --

in the growth of real GNP in the first quarter of

this year and the cumulation of recent restrictive policy measures,
the official projections for 1974 over 1973 shown in the table would
appear to be at the upper range of what seems feasible.

First,

most

ACTUAL GROWTH RATES OF REAL GNP, 1959-1973,
AND OFFICIAL FORECASTS, 1974
(percentage changes)

.Average
1959-60 to
1976-71

FrQm previous year
1974
1973
forecasts- l

same puarte~
Erom same quarter preceding year
73-QII * 73-QIII
73-QIV
74-QI
*

France/'

5.8

6.1

6.9

6.2

5.7

4.4

Germany

4.9

5.3

6.4

5.6

3.6

1.5

Italy-

5.5

5.9

United
Kifgdomb/

2.9

5.6

-1-1/4

5.3

5.8

3.2

-3.1

-1-1/2

12.2

9.2

5.9

-3.6

Japan

11.1

Canada

4.9

6.8

5.7

6.7

6.8

5.4

United
States

3.9

5.9

-3/4

6.2

5.6

4.0

0.2

b/
c/
d/

10.5

National sources and OECD Secretariat; for United States, FRB forecast.
GDP.
Quarterly GNP data not available.
Estimate predates recent stabilization measures.

III - 17
of the country projections assume a relatively fast expansion of
exports; if this expansion is less than expected, total activity
could be significantly lower than predicted.

Second, the outlook is

based on a general expectation of relatively strong private investment
demand.

The capacity shortages which became evident last year are

expected to motivate businesses to increase their investment plans
regardless of any short-term sluggishness of demand.

However, because

of weak capital market conditions, it may be difficult for some
companies to realize their investment intentions.

And third, since

inflation rates have cut into real purchasing power in most countries,
forecasts of some increase in consumption expenditures are predicated
upon falls in savings rates, which may not be as significant as expected.
A major danger in underestimating the downward risks inherent
in the current situation is that, if activity rates begin to fall off
much more rapidly than currently expected and if liquidity squeezes
produce a relatively large number of business failures, governments
may be forced to take expansionary action on a larger scale than
would be consistent with the aim of avoiding renewed inflationary
pressures.

Thus, the acceptance of the considerable downside risk does

not necessarily rule out the risk of continued inflation.
The United Kingdom provides a good example of the policy
dilemma facing the governments of the major industrial countries.

III - 18

After a very sharp upward spurt from mid-1972 through early 1973,
economic activity remained flat, although at a high level through
the rest of 1973.

The growth of real GDP in 1973 over 1972 was a

record 5.6 per cent, as compared to a longer run average rate of
just under 3 per cent.

Because of the disruptions associated with

the miners' strike and the oil crisis, there was a large drop in real
GDP in the first quarter of 1974, but not as great a decrease as
had been originally expected.

Measures announced in mid-December to

restrict demand have been maintained and were reinforced at the end
of March by the 1974/75 Budget.

However, in view of the likely

cumulative effects of these measures, the authorities now are considering
some easing of policy, despite the fact that consumer prices are
rising at a year-over-year rate of about 16 per cent.
Private consumption expenditure has been weak, and expected
slow or negative growth of real incomes, combined with the possibility
that consumers may want to rebuild their savings after a first quarter
rundown,suggests that it may remain so.

Private investment also is

not likely to show much strength, because of uncertainties about
current proposals regarding government participation in industry and
also because of financing problems.

As in other countries, tight

monetary conditions have led to a considerable fall in residential
construction.

III - 19
There are indications that there has been some shift of
resources into export industries, which is essential for the
achievement of the government's second major policy goal, the improvement of the external balance.

But the achievement of that goal, like

the fight against inflation, is likely to be a slow process, and
external pressures are not likely to be significantly relieved until
the pumping of North Sea oil in substantial volume begins.
In France, real

P in the six months ending in March 1974

rose at a seasonally adjusted annual rate of about 6 per cent, the
economy's potential rate.

However, since the beginning of 1974 growth

has slowed, and for the year as a whole the French authorities expect
real output to grow at a rate of about 5 per cent.

The recently

announced anti-inflation program aims at slowing growth in all sectors
of internal demand, in part because supply bottlenecks continue to
exist in various industrial sectors.

The stated goals of the plan are

first, to bring the rate of inflation, as measured by the CPI, down
from an average monthly increase of 1.4 per cent during the first five
months of 1974 to 0.5 per cent by mid-1975; and second, to reduce the
present monthly trade deficits, which averaged about Ff. 2 billion
per month during the first four months of 1974, by one-half by mid1975 and eliminate them by end-1975.

Since unemployment is already

high by French standards, the authorities hope that a strong demand

III -

for French exports will offset the decrease in domestic demand and
consequently, that output will not be affected.
The growth in government spending, consumption expenditure
and residential construction should weaken considerably this year compared with 1973.

At present,

per cent in volume this year.

investment is

forecast to increase by 5

However, this estimate seems optimistic

because of tight financial conditions.

In addition, the latest

government measures will undoubtedly limit borrowing possibilities
further, and the imposition of an 18 per cent surtax on 1973 corporate
taxes will put an additional burden on industry.

In this respect, the

government's austerity program seems to focus more on balance of payments aims than on eliminating capacity shortages in

various sectors.

In Germany, the positive overall rate of growth in the first
quarter of 1974 obscures a fall in internal demand which was more than
offset by a large increase in

the external surplus, with the volume of

imports decreasing and that of exports rising strongly.
of the overall growth rate,

With the slowing

the inflation rate has slowed to about 7

per cent, as measured by the year-over-year rate of increase in the

CPI, still high by German standards.

The government's policy is still

aimed primarily at moderating the inflation rate, and in particular,
at forestalling a further upward push on the price level because of
wage increases.

The spring negotiations yielded wage increases of

about 13-15 per cent, well above the government's 9 per cent guideline,

III - 21
and with current policies it

is hoped to bring the rate of increase

below these figures in negotiations later this year.
Because there was little

excess demand as early as the middle

of last year, the government began to ease up on its restrictive fiscal
policy towards the end of the year.

The 11 per cent investment tax

imposed on private investment in May 1973 was lifted in December,
government budget ceilings were relaxed, and the 10 per cent surtax on
middle- and high-income groups was allowed to expire as of July 1,
1974.

(Revenue from that source amounted to 1.6 billion DM in 1973.)

Under current legislative proposals, tax reform will add 12 billion DM
to disposable income at the beginning of next year.

Monetary policy

has been eased slightly in the past few weeks.
Official forecasts expect an increase in real GNP of about
2 per cent in 1974 over 1973, mainly because of continued strength of
the external sector, but with the rate of internal growth rising
through the year.

If internal demand fails to rise, the government

has indicated its willingness to take stronger expansionary measures.
The authorities are clearly concerned about the current structure of
demand with its heavy emphasis on exports, but expects that as capacity
constraints ease in other countries, the enormous trade surpluses will
recede, and the pattern of growth will shift towards greater dependence
on domestic demand factors.

III - 22
In Italy, an alarmingly accelerating rate of inflation, with
year-over-year rates of increase of about 15 per cent for the CPI and
45 per cent for the WPI,

coupled with intolerably large balance of pay-

ments deficits, has forced the government to impose severely restrictive
Last year, the Italian authorities had hopes of returning

measures.

the economy to a steady growth path after years of crippling social
strife.

In particular, it was hoped that an upsurge in private invest-

ment demand would provide the basis for further increases in output.
But the current situation has necessarily changed these policy goals.
Limits on credit extension and the import deposit scheme
have produced a liquidity squeeze which is becoming increasingly severe.
Short-term interest rates have risen sharply; the prime rate rose from
9.5 per cent early this year to 15.5 per cent in June.

The government

is now reenforcing these measures with a fiscal package that includes
increases in taxes and charges by public utilities and limits on the
growth of government expenditure.

The situation is sufficiently critical

to have enabled the precarious government coalition to obtain a
favorable vote of confidence for this stabilization program.

The aim

of the program is to slow down internal demand markedly by the end of
this year.
So far this year, the unemployment rate has continued to fall
and in April was 2.6 per cent compared to 3.0 per cent in the fourth
quarter of 1973; also, the labor force participation rate has increased.

III - 23

Industrial production, excluding the automobile sector, probably
remained stable during the first five months of this year.

However,

the large fall in demand for automobiles produced a decline in the

overall index.
With the shift in policy, the outlook for this year has
changed markedly.

Before the introduction of the stabilization pro-

gram, real GNP was expected to grow by about 4 per cent in 1974 over
1973, partly because of large increases in private investment and
buoyant private consumption. Now, both of these sectors are likely
to provide only a minor source of strength and it is hoped that most
of the slack will be taken up by export demand, although the authorities
are worried that demand conditions in other countries may be such as to

make this difficult.
Under the impact of the energy crisis and the restrictive
monetary and fiscal policies pursued by the Japanese authorities,
output has generally declined since late last year. Real GNP in the first
quarter declined by 5 per cent (over 20 per cent at an annual rate)
from the fourth quarter level, largely because of a 5-1/2 per cent
fall in real personal consumption expenditures.

The rapid upsurge

of inflation in Japan, with year-over-year rates of increase of consumer prices now over 20 per cent, cut heavily into real incomes and
caused consumers to curtail their purchases.

The large -- even by

Japanese standards -- wage increases negotiated this spring are likely

III

- 24

to stimulate consumption expenditure over the next few months, but
on balance, no substantial contribution to growth is expected from
this source.
The Japanese authorities are trying to achieve the dual policy
objectives of moderating inflation and bringing about a very substantial
improvement in

There appears to be some progress

the external balance.

toward achieving both goals.

Price increases have moderated somewhat,

remain high and consumer prices may accelerate again

although they still

in coming months because of planned increases in transportation and
communication rates, as well as in

rice prices.

On the external side,

exports have been increasing rapidly in recent months, outpacing the
rise in imports.

Consequently, the trade deficit has been cut down

from $1-1/4 billion in the first quarter of this year to a quarterly
rate of under $1/2 billion in April/May.
Despite the progress that is
stated policy goals,

being made towards the government's

the authorities have repeatedly declared that tight

policies will continue to be pursued until at least late this year,
because of a general fear that inflationary expectations could easily
be rekindled.

Thus,

government estimates put the change in GNP in

1974

over 1973 at minus 1-1/2 per cent.
In contrast to the situation in some of the other countries,
internal demand in Canada is quite strong.

Even if Canadian exports

III - 25
do not contribute to growth because of the slowdown in U.S.
real GNP for 1974 as a whole still

expected to increase at a rate

of about 5 per cent, approximately equal to potential.
elsewhere,

demand,

Although as

consumer spending may weaken and tighter credit conditions

may discourage investment, the world commodity boom and the energy
crisis have served to stimulate economic activity in Canada.
With year-over-year rates of increase in the CPI now about
11 per cent, there is a great deal of concern in Canada about inflation,
but policies have been less restrictive than in other countries.
Monetary policy has been tightened considerably since the early part
of 1973 in order to stem inflation, but official statements have
emphasized that monetary policy will continue to accommodate the
growth of output and employment.
The Canadian authorities have chosen to fight inflation by
trying to expand capacity and increase productivity rather than by
deflating demand.

However,

the Canadian opposition parties did

advocate the use of wage and price controls when they voted against
the government's budget.

The pre-election budget represented a more

or less neutral policy stance,

and Prime Minister Trudeau had pledged

to reintroduce the same budget proposals if elected.

Thus, given

Trudeau's victory in the July 8 election, the general strategy for
dealing with inflation will probably remain the same.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 16, 1974 : Greenbook

FRASER