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CONFIDENTIAL

(FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

July 12,

1972

TABLE OF CONTENTS
Page No.
Section

DOMESTIC NONFINANCIAL DEVELOPMENTS

Summary and GNP outlook.................. ................
*
..
*
........
Industrial production......,......*.......*...
......*...
...
*.....*.........
*
Retail sales..........
Unit sales of consumer durables....,.*...................
Michigan survey of consumer attitudes.....................
...................... ***
Cyclical indicators........
Inventories.................................

-12

..........

Manufacturers' orders and shipments.......................
Construction and real estate............................
........ .....................
Labor market............
Earnings..............................................
..........
..........
Wholesale prices.............
Consumer prices.........................................

DOMESTIC FINANCIAL SITUATION

- 1
- 7
- 7
- 9
-1O
-11
-14
-16
-17
-20
-22
-24

Summary and outlook....................................

- 1

Monetary aggregates.
..................
...........
Bank credit ..............................................

- 3
- 5

- 8
Consumer credit........................................
-10
Nonbank financial institutions and mortgage markete ......
-12
.......
Long-term securities............................
-16
markets..............................
Short-term security
-1
Federal finance....................................
INTERNATIONAL DEVELOPMENTS

III

Summary and outlook......... ..
....................
Foreign exchange markets.................................
Euro-dollar market ......................................
Balance of payments......................................
......
U. S. foreign trade...............................
Balance of payments and related developments in major
...........................
industrial countries........

1
3
6
7
9

-12

APPENDIX A:
Interest rates on automobile loans at finance companies...

A-1

DOMESTIC NONFINANCIAL
SCENE

July 12,
I

T -

1972

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

Latest Data-1972
Release
Period
Date
Data

Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At annual rates)

Unemployment rate (%)
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Manufacturing:
Average weekly hours (hours)

June
June
June
June

5.5
72.6
18.9
53.6

5.
0.3
-3.4
1.5

5.92.9
2.8
3.0

5.8-

2.7
1.6
3.1

June
June

7/7
7/7

37.2
3.62

1/
37.0-1
3.3

37.11
4.5

37.15.8

June

7/7

40.6

40.5-

40.41--

Inventories to sales ratio:
Manufacturing and trade, totalManufacturing r/
Trade

May
May
May

7/14
6/30
7/14

1.51
1.69
1.34

1/
1.5 1
1.69-1/
1.34- /

1.55
1.71.36-1/

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

June
June
June

118.5
118.0
120.0
124.7
122.4
119.2
132.7

Consumer prices (1967=100)
Food
Commodities except food
Services 2/
3/
Personal income ($ bil.)-

6/14

5.6
5.0
5.8
4.0
-1.0
6.1
2.8

915.9

4.8
4.5
4.7

1.85-1.37-1/
7-

2.1
-0.6
3.4
2.7
6.3

(Not at annual rates)

Retail sales, total ($ bil.)
AF
3/
Auto sales, total (mil. units)Domestic models
Foreign models
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense
Housing starts, private (thous.)
Leading indicators (1967=100)
1/
2/
3/

Actual data.
Not seasonally adjusted.
At annual rate.

June
June
June
June
June

7/10
7/10
7/6
7/6
7/6

36.4
9.7
10.69
9.00
1.69

6/30

33.6

6/30
6/30
6/16
6/72

8.8
1.5
2,322
140.0

-0.1
0.7
18.8
2.6
17.4

7.6
8.4
8.4
9.8
1.8

0.3

4.3

17.5

-0.2
-22.0
10.5
0.2

7.0
-13.8
-13.4
3.2

20.8
-1.2
13.5
11.6

-1.4
-1.1
-47.4
-6.3
10.1

1/
7/

I - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS

Summary.

Nominal GNP in the second quarter is now estimated

to have increased $29 billion, about the same as estimated four weeks
ago.

The GNP deflator appears to have risen appreciably less than

earlier expected, however, reflecting a slowing in construction cost
increases and a surprisingly moderate rise thus far in consumer service
prices.

Real GNP increased at an annual rate of close to 8 per cent

in the second quarter, according to present staff estimates.

This

compares with a projected rise at a rate of about 6-1/2 per cent made
four weeks ago, and an increase of 5-1/2 per cent in the first quarter.
Major factors accounting for the strength in the second
quarter were a sharp upswing in consumer spending, a continued rise in
business fixed investment, and an indicated increase in inventory
investment in contrast to the decline in the previous quarter.
Expenditures for residential construction appear to be peaking out,
however, and net exports of goods and services apparently showed no
improvement from the poor first quarter performance.
The latest available monthly data suggests less buoyancy than
in other recent months.

Industrial production in June is tentatively

estimated to have increased 0.5 per cent, the same as in May, but slower
than the pace earlier this year.

According to the advance report,

retail sales declined in June, following a large increase in May.
Domestic-type auto sales continued strong in June, but were off somewhat

I- 2
from the previous month.

In May,

manufactureres'

new orders for durable

goods edged up further, book value of manufacturing and trade inventories rose sharply, particularly at retail.
The unemployment rate declined sharply in June--to 5.5 per
cent, from 5.9 per cent--reflecting in part difficulties in seasonal
adjustment.

Nonfarm payroll employment was unchanged from May, after

a sustained advance.

In manufacturing, employment was down somewhat

but the workweek edged up.

Average hourly earnings in

nonfarm economy increased very little,

the private

for the second consecutive month.

The wholesale price index rose sharply in June,

as it

had in

May, prices of farm products and foods were again up considerably,
largely because of livestock and meats.

The increase in prices of

industrial commodities, at an annual rate of 5 per cent, was somewhat
above the post-freeze average.

In May, the consumer price index rose

at an annual rate of 4 per cent, following a small net increase in
March and April.
Outlook.

The staff continues to project strong gains in

GNP during the second half of this year.

real

As before, this projection

assumes growth in the monetary aggregates consistent with a 6 per cent
rate of expansion in M1 .
The smaller rise in both nominal and real GNP now projected
for the third quarter stems in part from postponement in

the effective

date of the increase in social security benefits to September 1,

with

I - 3

initial payments in early October; we had earlier assumed a 12-1/2 per
cent increase plus some liberalizations not in the bill as enacted,
effective July 1.

As a consequence, the increases in disposable

income and consumer spending have been lowered in this quarter and
raised in the fourth.

We have lowered somewhat our estimates of

inventory investment in the second half of this year, because of
recent benchmark revisions of manufacturing book value data which
raised stock-sales ratios.

The GNP fixed weight price index is expected to increase
at an annual rate of about 3-1/2 per cent in the second half of the
year, the same as estimated in the last Greenbook.

The unemployment

rate is projected at 5.3 per cent in the fourth quarter, also unchanged
from the projection four weeks ago.
STAFF GNP PROJECTIONS

Change in
Nominal GNP
$ billion
6/14/72 Current

Per cent increase, annual rate
Private GNP
fixed weight
price index
Real GNP
6/114/72 Current 6/14/72 Current

Unemployment
rate
6/14/72 Current

6/1

19711/
1972
1973

1972-1 /
1972-11
1972-III
1972-IV
1973-1
1973-11
1973-III

1973-IV
1/ Actual.

72.7
102.2
118.3

72.7
100.5
117.3

2.7
5.7
6.2

2.7
5.9
6.4

4.8
3.6
3.7

4.8
3.5
3.6

5.9

5.6
5.1

30.7
28.9
31.5
31.8

30.7
29.1
27.8
32.0

5.6
6.4
7.7
7.5

5.6
7.8
6.5
7.7

4.4
4.0
3.4
3.4

4.4
3.5
3.4
3.4

5.8
5.8
5.6

5.3

30.1
27.9

30.9
27.6
27.3
27.4

6.3
5.6
4.7
4.5

3.5

27.5
26.7

5.8
5.4
4.5
4.1

3.5
3.7
4.2
4.2

5.2
5.1
5.0
5.0

3.7
4.2
4.2

I-4

Summary quarterly figures for 1973 are shown in the accompanying
table, and detailed figures for the year as a whole in the full GNP
table.

Revisions in both nominal and real GNP in 1973 from the figures

presented in the Chart Show are minimal, and the price and unemployment
projections are unchanged.

I - 5

CONFIDENTIAL - FR

July 12,

1972

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted.
Expenditures and income
figures are billions of dollars, with quarterly figures at annual rates.)
1971

1972
Proj.

1973
Proj.

1971
TV

1972
Projected
III

1046.8
1044.5
811.5
811.5

1147.3
1141.7
883.4
888.5

1264.6
1250.1
968.8
970.0

1072.9
1070.4
829.6
834.2

1103.6
1103.0
853.4
859.6

1132.7
1128.7
874.2
880.2

1160.5
1153.5
892.7
897.2

1192.5
1181.5
913.4
916.8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

662.1
100.5
278.6
282.9

715.5
112.2
298.5
304.9

786.8
127.1
328.6
331.1

677.2
103.6
283.3
290.3

691.8
107.6
288.0
296.2

707.5
110.5
295.5
301.5

722.3
113.5
301.3
307.5

740.4
117.0
309.1
314.3

Gross private domestic investment

151.6
40.6
108.7
2.2
1.7

178.6
49 6
123.3
57
5.4

197.8
46.0
137.3
14.5
14.5

159.4
44.4
112.6
2.4
2.0

168.3
49.0
118.7
0.6
0.1

176.7
50.0
122.7
4.0
3.6

181.9
50.2
124.7
7.0
6.8

187 4
49.2
127.2
11.0
11.0

0.0
65 3
65.3

-5.0
70.5
75.5

-1.2
79.8
81.0

-4.6
60.4
65.0

-6.2
69.2
75.4

-6.0
68.9
74.9

-4.5
70.8
75.3

-3.4
73.0
76.4

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

233 0
97 6
71.4
26.2
135 5

258.2
107.4
77.7
29.7
150.8

281.3
109.6
78.6
31.0
171.8

240.8
100.3
71.4
28.9
140.5

249.6
104.9
75.8
29.0
144.8

254.5
106.5
77.0
29.5
148.0

260.8
108.3
78.1
30.2
152.5

268.1
110.1
79.9
30.2
158.0

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

739.4
141.6

782.9
146.5

832.8
151.8

751.3
142 8

761.6
144.9

776.4
145 9

789.1
147.1

804.4
148.3

Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)

857 0
574 2
741.3
60.5
8.2

929.2
629 0
791.0
56.2
7.1

1016.6
690.3
873.9
66.9
7.7

876 7
587 0
755 0
59 0
78

900.1
608.9
764.3
53.5
7.0

916.6
621.9
778.0
51.3
6.6

935.6
634.9
798.3
56.6
7.1

964.4
650.2
823.5
63.5
7.7

85.5
81.0

100.9
97.4

118.4
111.5

86 0
85.6

91.9
90.2

98.0
95.1

103.0
99.6

110.5
104.7

227 8
247.8
-20.0

246.1
270.3
-24.2

203 0
228 7
-25 7

222 2
235.5
-13.2

227 6
249.4
-21.8

234 6
262.4
-27.8

2 9

-0.8

-8.3

6 6

9.2

0.6

-1.8

-11.0

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

86 9
2.8
84.1
5.9

89.0
2.4
86.6
5.6

90.9
2.4
88.5
5.1

87 7
2 7
85.0
5.9

88.4
2.5
85.9
5.8

88.8
2.4
86.4
5.8

89.2
2.4
86 8
5 6

89.7
2.4
87.3
5.3

Nonfarm payroll employment (millions)
Manufacturing

70.7
18.6

72.7
19 0

75.0
19.7

71.0
18.6

71.8
18.7

72.5
18.9

73 0
19.1

73.6
19.3

109.3

111.6

Gross National Product
Final purchases
Private
Excluding net exports

Residential construction
Business fixed investment
Change in business inventories
Nonfarm
Net exports of goods and services 1/
Exports
Imports

Corporate profits before tax
Corp. cash flow, net of div. (domestic)
Federal government receipts and
expenditures (N I A. basis)
Receipts
Expenditures
Surplus or deficit (-)
High employment surplus or deficit (-)

198.8
221.9
-23.1

112.8

Industrial production (1967 = 100)
Capacity utilization, manufacturing
(per cent)

106.3
74.6

76 8

80.0

74.1

75 1

76 4

77 2

78 4

Housing starts, private (millions, A.R.)
Sales new autos (millions, A R.)
Domestic models
Foreign models

2.05
10.13
8.68
1.46

2.27
10.65
9 17
1.48

1.93
11.06
9 59
1.47

2.24
10.48
9 20
1.28

2.51
10.10
8.70
1.40

2.27
10.74
9.21
1.53

2.20
10.75
9.25
1.50

2.10
11.00
9.50
1.50

122.2

107.0

226.8
243.8
-17.0

1/ The projected GNP exports and imports of goods and services, and their net, are based
changes projected in balance of payments exports and imports, shown below. These are
'71-IV figures not yet incorporated in the GNP accounts
-4 6
-2.1
0.3
-3 4
0.8
Net exports of goods and services
70.7
62.7
81.3
72 0
66.0
Exports
75.3
64 8
81.0
75.4
65 2
Imports

113.8

116.6

on quarter-to-quarter
consistent with revised
-4.4
70.4
74.8

-2 9
72.3
75 2

-1.9
74 5
76 4

July 12,

CONFIDENTIAL - FR

1972

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1971

1972
Proj.

1973
Proj.

1971
IV

1972
Projected
II
III

------------------- Billions of Dollars------------------Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government

72.7
-0.6
73.2
59.6
63.2
-3.6
13.6

GNP in constant (1958) dollars
Final purchases
Private

19.4
19.6
19.8

100.5
117.3
3.5
8.8
97.2
108.4
71.9
85.4
77.01/ 81.5
/
-5.03.823.0
25.2
43.41/
41.6
34.0

49.9
43.8
39.5

30.7
-1.8
32.6
23.8
25.4
-1.6
8.8

29.1
3.4
25.7
20.8
20.6
0.2
4.9

10.6
7.7
4.1

10.3
12.4
10.9

14.3
12.2
10.8

32.0
4.0
28.0
20.7
19.6
1.1
7.3
13.2
10.6
8.6

15.3
12.5
10.0

Per Cent Per Year-------------------

-------------------Gross National Product
Final purchases
Private

19.5
3.6
15.8
8.8
13.4
-4.6
7.0

2/
7.6-

9.5
9.7

6.0
4.3

12.0 2/
12.2
11.5

10.2

11.0
9.7
9.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

7.5
13.4
5.3
7.8

8.1
11.6
7.1
7.8

10.0
13'.3
10.1
8.6

5.0
3.1
4.4
6.3

8.6
15.4
6.6
8.1

9.1
10.8
10.4
7.2

8.4
10.9
7.9
8.0

10.0
12.3
10.4
8.8

Gross private domestic Investment
Residential construction
Business fixed investment

12.0
33.6
6 5

17.8
22.2
13.4

10.8
-7.3
11.4

22.8
15.9
12.1

22.3
41.4
21.7

20.0
8.2
13.5

11.8
1.6
6.5

12.1
-8.0
8.0

8.9

12.0
11.1

14.6
18.3
24.6
1.4
12.2

Gov't. purchases of goods & services
Federal
Defense
Other
State & local
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
3/
Private GNP fixed weight index--

2.2
1.2
4.4
13.9

6.8
21.9
12.6

2.7

5.9

6.4

5.82-

7.8

6.5

7.7

4.7
4.8

3.5
3.5

3.6
3.6

2/5/
2/4/
5
6.0 ,- / 2.7
1. 7
4.43.5
1.8-

3.2
3.4

Personal income
Wage and salary disbursements
Disposable income

5.62-

9.4
9.7
10.5

5.6
6.7
3.5

10.7
14.9
4.9

7.3
8.5
7.2

8.3
8.4
10.4

12.3
9.6
12.6

13.4

18.1

17.4

0.9

27.4

26.6

20.4

29.1

3.8
8.2

14.6
11.7

8.0
-9.1

10.5
7.3

37.6
11.9

8.3
14.1

1.4
9.2

12.3
20.9

Nonfarm payroll employment
Manufacturing

0.1
-3.9

2.8
2.2

3.2
3.7

2.2
0.9

4.3
2.5

3.9
4.3

2.8
4.2

3.3
4.2

Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models

-0.4
43.4
21.3
21.9
18.7

8.3
-15.0
3.8
4.6
-0.5

24.2
7.4
20.1
-66.4

8.5
48.5
-14.5
-21.7
37 5

8.6
-38 7
25.3
23.4
37.1

8.0
-12.3
0 4
1.7
7.8

9.7
-18.2
9.3
10.8
0.0

Corporate profits before tax
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures

4.2

On a balance of payments basis $-4.2 billion in 1972 and $3.7 billion in 1973.

At compound rates.

Using expenditures in 1967 as weights.

4/ Excluding the first $1.2 billion, annual rate, of the volunteer army pay increase,
cent per year.
5/

Excluding the remaining $1.2 billion, annual rate, of the volunteer
the general Federal employees pay increase, 4.3 per cent per year.

1.2 per

army pay increase and

I-7
Industrial production.

Industrial production is tentatively

estimated to have increased about 0.5 per cent further in June with
output gains in both products and industrial materials.

After revisions

(going back to early 1970) the June index is likely to exceed the
previous peak of September 1969 by about 1 per cent.
Among consumer goods, production of some household appliances,
furniture, and staples apparently showed further gains.

Auto assemblies

in the first three weeks in June changed little from the May rate of
8.8 million units.

On the basis of production worker manhour data,

output of business equipment is estimated to have recovered further and
production of defense equipment to have risen.
Output of raw steel rose slightly in June and further gains
in production of construction materials, textiles, paper, and chemicals
are indicated.
Retail sales.

Sales in the second quarter were 2.8 per cent

above the first quarter despite a 1.4 per cent decrease from May to
June.

Some drop back was not unexpected following the unseasonally

upsurge in May and the adverse effects of floods and cool weather in
many parts of the country.

In June every major category of store

reported lower sales but, as frequently happens, the swing was largest
for the volatile automotive group.

Durables as a group declined 1.8 per

cent and nondurables were off 1.2 per cent.

I-8
The second quarter averages were characterized by strength
in both the durable and nondurable categories.

Durable goods sales

increased about 3-1/2 per cent from the first quarter, largely because
of a sizable gain in the automotive group.

Furniture and appliance

sales declined slightly following an unusually large rise.

Nondurable

goods sales in the second quarter rose 2.5 per cent--unusually strong
for this slow moving broad category.

Sales were strong in both the

food and general merchandise groups.
RETAIL SALES
(Seasonally adjusted, percentage change
from preceding quarter and month)

1972
April

May

June

2.8
3.4
5.7

- .4
-1.0
- .1

1.8
2.2
3.3

-1.4
-1.8
-2.3

9.2

-1.2

-2.1

-1.0

1.6
1.7

2.5
3.6

- .2
1.0

1.6
1.8

-1.2
-1.0

2.3

2.9

-1.0

3.6

- .9

Total, less auto and
nonconsumption items

2.1

2.5

- .1

1.3

-1.2

GAAF

3.0

1.8

- .3

2.2

-1.1

Real*

n.a.

- .4

1.4

n.a.

IV-IQ

I-IIQ

Total sales
Durable
Auto
Furniture and
appliance

1.2
.3
-3.1

Nondurable
Food
General
merchandise

Deflated by all commodities CPI, seasonally adjusted.

I - 9

Unit sales of consumer durables.

Sales of new domestic-type

autos in June were at an annual rate of 9.0 million units, compared
with 9.6 million in May.

This was the first decline since December

For the second quarter as a whole, sales were at a 9.2

last year.

million unit annual rate compared with 8.7 million in the first quarter
and 8.3 million a year earlier.
June sales of imported autos were at a 1.7 million annual
rate, up from 1.5 million(r) in May but about the same as a year
earlier.
in

The import share of total sales was again 14 per cent, as

the preceding two months.

In June last year,

the import share was

16 per cent.
Partially complete data indicate retailers' unit purchases
in June of major home appliances declined 4 per cent from May, the
second straight monthly drop, but they were 5 per cent above June a
year ago.

Increases from May were registered for refrigerators,

electric ranges, and dishwashers with other items steady or down.
Compared to a year earlier, all items showed increases except air
conditioners for which purchases have been affected both by the cooler
weather this year and excessive accumulation of dealer inventories
last year.

Retailer purchases of TVs showed little change from May

but were 21 per cent above a year ago.

Radio purchases were up

substantially from both a month and a year ago.

I - 10

UNIT PURCHASES OF HOME GOODS BY RETAILERS
Seasonally adjusted, 1967=100

Per cent change
Year ago
Month ago

1971
June

April

1972
May

June

TVs 1/

109

141

131

130

Radios

105

Home Appliances 2/126

146

138r

132e

-4

-1

16
5

1/ Includes foreign-made units sold under U. S. brand names.
2/

Foreignmade sold under foreign brands not included.
Weighted average of indexes for room air conditioners, dishwashers,

dryers, freezers, electric ranges, gas ranges, refrigerators,
washing machines, and vacuum cleaners. Weights are 1967 retail
sales values.
Michigan survey of consumer attitudes.

After moving up

very strongly in February, consumer attitudes in late April and May
improved moderately further, according to the Michigan Survey.

The

index of sentiment in May was up almost 2 percentage points from
February and well above the trough in mid-1970.
In the February survey, answers to all five questions in
the index of sentiment improved and the increase of 5 percentage
points was the largest since mid-1958.

In the latest survey, however,

there were conflicting changes among components, a situation which in
the past has been associated with a weaker relationship between changes
in the index and the outlook for consumer spending.
Consumer attitudes toward present and expected personal
financial conditions improved strongly.

Advances in these components

I - 11

are

generally associated with greater willingness to purchase durable

goods and to borrow on instalment credit.

In contrast, opinions about

business conditions in both the next 12 months and next 5 years
deteriorated in the May survey.

These seem to have been related to

a growing lack of confidence in Government economic policy.

Following

the President's announcement of wage and price controls last August,
confidence in the ability of the Administration to control prices and
improve employment increased sharply.

During the latest 6 months,

however, faith in these policies has decreased and opinions about likely
success of the Government in dealing with these key economic problems
are now almost back to where they were in May 1971.
Cyclical indicators.

The Census trend-adjusted composite

index of leading indicators rose only 0.2 per cent in May(p).

However,

it is likely that the May figure will be revised upward, as a result
of increases in inventory change and consumer instalment debt change-series not included in

the preliminary index--and upward revisions in

new orders.
Leading series increasing in May were housing permits and
industrial materials prices.

Series declining were the workweek,

unemployment claims (inverted), new orders for durable goods, contracts
and orders for plant and equipment, common stock prices, and the ratio
of price to unit labor cost.
The coincident and lagging composits rose in May.

I - 12

CHANGES IN COMPOSITE CYCLICAL INDICATORS
May 1972 (p)

Per cent change from:
Three months
Previous
earlier
month

12 Leading (trend adjusted)
12 Leading, prior to trend
adjustment
5 Coincident
5 Coincident, deflated
6 Lagging

3.2

-.2
.7
.6
1.0

2.1
2.4
2.2
3.9

Of the leading indicators available so far for June,
industrial materials prices declined slightly but common stock prices
and the manufacturing workweek rose, according to preliminary data.
Inventories.
sharply in May.

Book value of business inventories rose

The $14 billion(p) rate of increase was well above the

upward-revised April rate.

Manufacturers' stocks at a $4.9 billion

rate, after declining slightly in April, and there were large and
widespread increases at retail outlets; these were partly offset by a
lower rate of accumulation for wholesale trade.

I - 13

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
Seasonally adjusted annual rate, billions of dollars

1972
April

Q I

(Rev.)
Manufacturing and trade
Manufacturing, total
Durable
Trade, total
Wholesale
Retail

Manufacturers'

May

(Rev.)

(Prel.)

5.8
3.1
2.9

8.4
- .3
- .3

14.2
4.9
5.5

2.7
1.0
1.7

8.7
4.8
3.9

9.3
1.0
8.3

and retail sales also increased and the

business inventory-sales ratio was unchanged at 1.51, following a drop
in April.
Durable goods manufacturers'

stocks rose slightly relative

to unfilled orders.
INVENTORY RATIOS

1971

1972

April
(r)

May
(r)

April
(r)

May
(p)

1.61

1.60

1.51

1.86

1.85

1.69

Nondurable

2.29
1.37

2.26
1.38

2.01
1.30

Trade, total
Wholesale
Retail

1.37
1.24
1.45

1.37
1.21
1.47

1.34
1.22
1.41

1.34
1.23
1.41

Inventories to sales
Manufacturing and trade
Manufacturing and trade
Durable

Inventories to unfilled orders
Durable goods manufacturing

.914

.927

.900

.903

I - 14

inventories and shipments have been revised

Manufacturers'

to incorporate 1970 benchmarks and other revisions.

Past rates of

inventory growth were increased by $200 million in 1969 and nearly $1
billion in 1970.
revised downwards,

In addition, shipments and unfilled orders were
and as a result,

ratios of inventories to sales and

unfilled orders of durable goods rose considerably more in 1970 than
had been previously indicated.
in

The new data still show marked declines

the inventory-sales ratio since 1970,

than before the revision.
high before the revision,

but the ratio remains higher

The ratio of inventories to unfilled orders,
is

even higher now.

The revised ratios are

more consistent with the persistence of low rates of inventory accumulation in 1971.

The revision raised recent inventory-sales ratios for

manufacturing and trade combined by .05.
Manufacturers'
goods rose 0.3 (p)
in April.

orders and shipments.

per cent in May,

On average,

New orders for durable

following a 2.2 per cent increase

new orders in April and May were well above the

first quarter, continuing on a strong upward trend.

Except for defense

orders, which were off from a high first quarter, and motor vehicle
orders, which were little changed, all major market groupings were
substantially above their first-quarter levels.

I - 15

MANUFACTURERS'

NEW ORDERS FOR DURABLE GOODS
Per cent change
from
May
May from

April-May average
April-May average

April (p)

from Q I average (p)

3.5

Durable goods, total
Primary metals
Motor vehicles and parts
Household durables
Capital goods industries:
Nondefense
Defense
Construction & other durables

7.9

-5.1
3.4

-22.0
2.8

5.5
.1
9.7
5.8

-15.2
4.3

Shipments and unfilled orders also increased in May.

The

0.3 per cent increase in unfilled orders was somewhat smaller than
in previous months.
Manufacturers' orders and shipments have been revised,
incorporating benchmark data for 1970 and seasonal and other revisions.
As a result, the current level of new orders for durable goods is
more than $2 billion lower than indicated earlier.

The revised orders

figures decline somewhat more in 1969-70 and increase somewhat less
since then, but the recovery is still indicated to be strong, with the
May 1972 level of orders 30 per cent above the lows reached in OctoberNovember 1970.

PER CENT CHANGES, NEW ORDERS FOR DURABLE GOODS
Before and After 1972 Revision

Before

After
revision

revision
October 1968 to September 1969
September 1969 to OctoberNovember 1970

4.8

-12.4

October-November 1970 to
March 1972

-14.3

29.2

Construction and real estate.

26.6

Seasonally adjusted value of

new construction put in place in June was at an annual rate of $122
billion, little changed from May and only slightly below the recent
high in March.

Within the private sector, outlays for new residential

construction, which lag starts, edged upward to contribute to a
moderate second quarter rise from the advanced first quarter pace.
Nonresidential construction outlays were little
the second quarter as a whole.

changed in June and in

However, public construction outlays

in June apparently remained below their record first

quarter average.

Construction costs have continued to show little further
rise this year.

In June they averaged less than 5 per cent above a

year earlier, according to the seasonally adjusted Census index.

This

increase compares with an average advance of 7 per cent during 1971 as

a whole.

I - 17

NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)

QII(p)

1972
I April(r)

May(p)

June 2/

121.8

121.5

120.6

121.8

122.0

90.7

91.8

91.7

92.0

51.5
39.1

52.5
39.3

52.7
38.9

52.2
39.5

52.5
39.6

31.2

29.7

28.9

30.2

30.0

26.6
4.5

25.4
4.3

24.8
4.2

25.6
4.5

25.6
4.3

QI(r)
Total
Private

Residential
Nonresidential
Public
State and local
Federal
1/

Reflects revision of series to incorporate more complete data
and new seasonal adjustement factors back to January 1969. For
QI, 1972, the major effect of the revision was to raise private
nonresidential construction outlays by 2 per cent. Other changes
were quite minor.
Data for June 1972 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.

Sales of used homes in May were running 15 per cent above
the advanced level of a year earlier.

The median price of such homes

increased further--to $27,140, partly reflecting upgraded demands.
Labor market.
strength in June.

Demand for labor showed signs of some additional

Although nonfarm payroll employment remained at the

(upward revised) May level, total civilian employment advanced appreciably and the factory workweek edged up.

I - 18

The seasonally adjusted unemployment rate dropped to 5.5
per cent in June from 5.9 per cent in May.

However, all of the decline

occurred among younger workers, 16 to 24 years; their number in the
labor force declined by 300,000.

In part the decline in youth

unemployment reflected seasonal adjustment problems (also evident in
other recent years) associated with younger workers entering the labor
market at the end of the school year.

Unemployment among adult workers

showed no significant improvement over the month--the rate for males
25 years and over edged down 0.1 percentage point to 3.3 per cent while
rates for household heads and married men remained unchanged.

Total

(household) employment rose by 275,000 from the May level, continuing
the upward treand which began last summer as an increase of 440,000
for adults was partly offset by a decline in employment of teenagers.
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1972

1971
June
Total
Men
20 to 24 years
25 and over
Women
20 to 24 years
25 and over
Teenagers
Household heads

December

May

June

5.8

6.0

5.9

5.5

10.1
3.4

10.5
3.5

9.4
3.4

8.3
3.3

10.1
4.7
16.2
3.7

9. 6
5.0
17.3
3.8

10.6
4.8
15.7
3.6

9.2
4.8
14.5
3.6

I - 19

In contrast to the household series, the preliminary estimate
of nonfarm payroll employment in June showed essentially no increase
Declines in

from May, after rising rapidly for several months.

manufacturing and Federal government were about offset by advances in
services and State and local government, while the trade sector was
unchanged.

Over the past year nonfarm payroll employment has increased

by 1.9 million including over 300,000 manufacturing.

Employment gains

have been brisk in trade, services and State and local government, and
the growth of factory jobs has been accelerating.

Manufacturing

employment in June, however, was still 1.3 million below the high in
the summer of 1969.

NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)
Change from

Change from preceding

year ago*
1972
June

quarter
1971
Q III Q IV
- 37

387

756

672

279
308
- 19
- 10

-168
-115
- 14
- 39

38
41
- 56
53

170
116
63
9

177
221
- 12
- 32

350

586

493

199

162

138
15
135

160
1
167

168
- 15
145

Service-producing
Transportation & p.u.

Trade
Finance & services
Federal government
State & local gov't.
*

Not seasonally adjusted.

1972
Q II

1919

Total
Goods-producing
Manufacturing
Mining
Construction

1640

130

- 53
88
100
- 2
- 3

518
-

587
8
491

I - 20

Another sign of recent strengthening in demand for labor has
been firmness in the workweek.

In the second quarter, average weekly

hours of production and nonsupervisory workers on private payrolls
edged up 0.1 hour to 37.2 hours, while the average factory workweek
jumped 0.3 hours to 40.6 hours.
Earnings.

Average hourly earnings of production workers

on private nonfarm payrolls (adjusted for inter-industry shifts and
in manufacturing for overtime as well) rose by small amounts in both
May and June--according to preliminary data--with virtually no
increases occurring outside of manufacturing.

Due to a sharp rise in

April, however, the annual rate of increase in hourly earnings in
the second quarter about equaled the Pay Board guideline of 5.5 per
cent--a full percentage point less than the rate of rise prior to the
freeze.

As compared to the entire period of the economic stabilization

program (August-June), the rate of wage rise in the second quarter
slowed in most industries.

I - 21

HOURLY EARNINGS INDEX*
(Per cent change, seasonally adjusted, annual rates)

Jan.
Jan. 19711971Aug. 1971
Private nonfarm

6.7

Manufacturing
Mining
Construction
Transportation & P.U.

6.1
8.0
9.0
8.0

Trade
Finance
Services

6.5
7.6
4.4

Apr. 1972-

Aug. 1971-

QI 1972-

5.6

1.8

6.1
6.5
5.1
10.0

5.6
4.2
4.8
10.0

5.8
3.1
.8
1.3

4.2
4.1
4.8

4.2
7.3
4.4

.4
-3.1
-2.2

Aug. 1971June 1972

QI 1972QII 1972

Apr. 1972June 1972

Adjusted for inter-industry shifts and, in manufacturing only, for
over time hours.

The Pay Board has reported that the weighted average of
approved wage increases during the four weeks ending June 23 for
Category I and II cases (firms with over 1,000 employees) amounted to
5.5 per cent and affected 2.6 million workers.

For Category I cases

alone (5,000 or more employees) the weighted average increase approved
for new contracts came to 6.1 per cent and for deferred increases to
5.5 per cent.

I - 22

Wholesale prices.

The wholesale price index rose at a

seasonally adjusted annual rate of 5.7 per cent between May and June.
Industrial commodities increased at a rate of about 5 per cent,
what faster than during the first

half of this year.

some-

An increase in

prices of materials, especially intermediate materials, contributed
significantly to the rapid advance.

Prices for both producer and

consumer nonfood finished goods rose but at rates slower than in
either the pre- or post-freeze periods.

WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)

Phase I & II
Phase II
Pre-stab. period Phase I
Aug. 1971
Aug. 1971 Nov. 1971 May 1972
Dec. 1970
to
to
to
to
to
June 1972
Nov. 1971 June 1972 June 1972
Aug. 1971
5.2

- .2

5.2

5.7

3.6

6.5

1.1

7.6

6.2

5.6

4.7
Industrial commodities
3.3
Crude materials 2/
Intermediate materials 3/ 6.5
2.7
Finished goods 4/
3.7
Producer
2.2
Consumer

- .5
2.3
- .7
- .9
-2.0
- .4

4.3
8.5
4.8
3.3
4.1
2.9

5.1
6.7
7.3
2.4
3.1
2.1

2.8
6.6
3.1
2.0
2.2
1.9

All commodities
Farm products 1/

1/
2/
3/
4/

Farm products and processed foods and feeds.
Excludes crude foodstuffs and feedstuffs, plant and animal fibers,oilseeds, and
leaf tobacco.
Excludes intermediate materials for food manufacturing and manufactured animal
feeds.
Excludes foods.

I -

Prices of farm and food products rose at a seasonally adjusted
annual rate of more than 6 per cent from May to June as further sharp
increases were posted for livestock and meat.

Increases were also large

for live poultry and fresh vegetables.
Announcements of pricing actions since the mid-June pricing
date for the WPI include those concerned with extending controls to unprocessed foods previously exempt from price controls, proposed increases
for automobiles and trucks, and lower prices for copper.
extension of price controls t

The President's

some agricultural products applies pri-

marily to fresh fruits and vegetables, eggs, and seafood and in application will be similar to controls now on meats.

That is,

the initial

price of these products can still be set by supply and demand, but
wholesalers and retailers will be allowed only their customary initial
percentage markups.
Three automobile producers have asked the Price Commission
for approval to increase prices of 1973-model cars and trucks by amounts
averaging from 2 to 5 per cent or from $90 to $180 per vehicle, with the
largest producer requesting the smallest increase.

About $80 of these

increases was requested to cover costs of Government-required safety
and exhaust-emission equipment.
Copper prices were cut by 2 cents a pound by some major U.S.
producers;
tion.

low prices in

outside (nonproducer)

markets spurred the reduc-

The lower copper prices can be expected to become industry-wide

and to be reflected in

prices of fabricated copper products.

I - 24

Consumer prices.

The consumer price index rose in

seasonally adjusted annual rate of 4 per cent.
1 per cent rate,

seasonally adjusted,

May at a

Food prices fell at a

but prices of other commodities

--boosted by sharp jumps for gasoline and used cars--rose at over a
6 per cent annual rate.
was under 3 per cent.

The rate of rise in service costs, however,
Since November, consumer prices have advanced at

a 3.5 per cent (seasonally adjusted) annual rate, and since August at
a 2.9 per cent rate.

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

Pre-stabilization period I Phase I
Aug 1971
Dec 197u
to
to
Nov 1971
Aug 1971
All items
Food
Commodities less food
Services 1/

Phase II
Apr 1972
Nov 1971
to
to
May 1972
May 1972

3.8

1.9

3.5

4.0

5.0
2.9
4.6

1.7
.0
3.1

4.4
2.9
3.6

-1.0
6.2
2.8

4.6

1.3

3.5

3.0

6.7

1.9

3.5

2.8

2.5

2.8

5.2

Addendum:
All items less mortgage
costs 2/
Services less h me
finance 1/ 2/
Commodities less food,
used cars, home purchases 3/

1/ Not seasonally adjusted.
2/ Confidential: 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.
3/ Confidential.

I - 25

The May index for food reflects the second monthly decline
in beef and pork prices, following reductions at the wholesale level.
However, according to the Department of Agriculture preliminary
(confidential)

estimates based on its

retail meat

chain store sample,

prices have risen substantially between the CPI's first-week pricing
dates in May and June.

But these estimates also indicate a squeeze on

margins for beef, as well as pork, by mid-June which, with the continued advance in

prices at the farm and wholesale levels,

further advances at retail.

points to

Some of the increase will be seasonal,

especially for pork which usually rises over 3 per cent in
May and July (4.5 per cent between May and August).
meat supplies is

still

price between

Improvement in

expected by late August.

SELECTED COMMODITY PRICES
(Percentage changes, seasonally adjusted, annual rates)

Pre-stabilization period
Dec 1970
to
Aug 1971
2.2

Meats
Gasoline and motor oil
Used cars 1/
1/

Phase I
Aug 1971
to
Nov 1971

Phase II
Nov 1971 Apr 1972
to
to
May 1972 May 1972

8.9

11.6

-13.3

- .7

- .9

19.7

1.9

-6.3

-1.1

10.5

Seasonally adjusted estimates confidential,

not for publication.

Nonfood commodity price increases were fairly widespread in
May,

but the acceleration was largely due to sharp reversals in

and used car prices.

These two groups still

gasoline

show slight net declines

I - 26

since November, however.

Advances in rent and other service components

continued moderate.
The 3.5 per cent rate of rise in consumer prices over the
six months of Phase II is not much less than that during the eight
months of 1971 immediately preceding the freeze, when the rise was
held down by sharply falling mortgage costs, but is still well below
Food prices, mainly meats, contri-

the increases of preceding years.
buted significantly to the Phase II

increase, while service cost

advances slowed notably--for rents, medical care, and most other
services except utilities.
The nonfood commodity price rise over the Phase II period-close to a 3 per cent annual rate--was similar to that in the first
eight months of 1971 but considerably less than in 1968-70.

Significant

advances were registered for new cars, apparel, household durables and
most other items except gasoline and used cars.

Part of the six-month

increase may be considered "catch-up", and including the freeze period
reduces the rate to 2 per cent.

The Price Commission is studying

requests for auto price increases and measures to limit the impact on
apparel prices of advances for fibers and textiles.

Among the measures

considered is application of the dollar-for-dollar passthrough adopted
for leather costs to shoe manufacturers.
The Price Commission recently announced a 3 per cent "cap"
on increases for nonexempt service industries (2.5 per cent for professional
services), affecting about 5 per cent of firms and 30 to 40 per cent of
sales.

Most service firms had been included in

the Cost of Living Council's

I - 27
May ruling which exempted from controls those with 60 or fewer employees.
The services affected represent only part of the services component in
consumer price measures.

Major items under separate regulations permitt-

ing larger increases include rent and utilities, which account for about
one-fourth of the weight of services in the CPI and about one-third if
home financing costs are excluded (and over 40 per cent of the consumer
services component of the GNP, in which rent is used as a proxy for the
cost of services of owner-occupied homes).

The weight of medical care

services, also under separate regulation, is an additional 15 per cent.

DOMESTIC FINANCIAL
SITUATION

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

Latest data
Indicator

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

Period

Level

Month
ago

June
June

33.1
30.2

8.4

June
June
June

236.5
490.3
765.7

4.1
9.6
10.4

5.1
8.5
10.6

4.9
8.8
11.3

June
June
June
June

253.8
37.1
275.4
516.3

14.8
0.8
12.3

11.8
3.7
14.4

9.6
7.7
16.1
11.2

July
July
July
July
July

June
June 28
July 10

Credit demands

June
Business loans at commercial banks
Consumer instalment credit outstanding
May
May
Mortgage debt outst. (major holders)
July
Corporate bonds (public offerings)
Municipal long-term bonds (gross
July
offerings)
Federally sponsored Agcy. (net borrowing)July
July
U.S. Treasury (net cash borrowing)
Total of above items
e - Estimated.

Net change from
Three
months ago

SAAR (per cent)
12.9

7.3

Percentae or index points
4.61
.13
.36
4.06
-. 20
.45
4.82
.34
.41
7.38
.13
.05
.12
5.43
-. 06
7.62
.08
2.90
59.84

Year
ago

8.3
7.0

-. 57

-1.31
-. 93
-. 49
-. 57
-.30
-.20

-4.08

Net change or gross offerings
Current month
Year to date
1972
1971
1972
1971
-1.0
1.4
4.7
1.7

-0.5
0.5
e
e
e

1.9
0. 3 e
e
2.1

11.1

3.3
1.3

4.1

5.5
19.4
7.0

2.0
0.9
4.2

14.0

11.7

52.4

2.1 e
0. 3 e

2.3
1.8
13 .
16.2
14.9
-1.1
7.4
55.1

II - I

DOMESTIC FINANCIAL SITUATION
Interest rates on short-term securities have advanced 10
to 30 basis points on balance since the June Committee meeting.

long-term markets, rates on corporate and municipal bonds rose throughout June, as investors exhibited caution in the face of rising short
rates and concern about price developments.

Corporate public bond

volume in June was the lowest in almost a year and rates tended to level
off early in July.

Mortgage credit demands remained strong, but given

the ample availability of credit, it

is likely that mortgage rates in

the primary market were unchanged in June.

Inflows of funds to the

nonbank thrift institutions remained sizable in June,and these institutions apparently continued to extend new mortgage commitments at a

rapid rate.
Consumer-type time deposits at commercial banks grew at
a faster rate in June than in other months of the quarter, even though
yields on open-market securities were rising over the period.

Expansion

in large negotiable CD's slowed in June from the rapid rate of April
and May.

With CD growth reduced, expansion in demand deposits moderate,

and a sharp drop in U.S. Government deposits, the bank credit proxy
rose at a modest rate in June.
End-of-month bank credit figures indicate that banks continued to extend real estate and consumer loans in volume during June.
But business loans appeared to decline appreciably
gains earlier this year.

following strong

This probably is a transitory phenomenon,

reflecting in part seasonal adjustment difficulties.

Banks contacted

II - 2

by Reserve Banks continue to report fairly strong loan demand,
particularly outside New York.

Late in June the prime rate was

increased to 5-1/4 per cent, and a few banks with floating rates moved
higher early in July.
Outlook.

Short-term interest rates are expected to rise

further as the summer progresses in view of the continued strength in
prospect for economic activity and a resumption of Treasury borrowing.
However, Treasury borrowing in the third quarter has been scaled down
to around $5 billion, more than a third less than anticipated a month
ago. With a strong cash position--bolstered by sales of special
certificates to foreign central banks--the Treasury is not expected to
raise new cash, other than through additions to the weekly bill auctions,
prior to the mid-August refunding.

But Treasury borrowing in the

fourth quarter is likely to be substantial.
Banks are likely to experience appreciable business loan
demands over the quarter in association with the projected strong
growth in GNP, including inventory accumulation.

While deposit inflows

are expected to be generally moderate, given a rise in short-term
market rates, banks are likely to attract sufficient funds to acquire
other loans and modest amounts of securities.
While deposit flows to nonbank thrift institutions may slow
a little further in coming months, mortgage credit supplies will
probably continue ample.

The demand for new mortgage commitments should

ease given the projected decline in housing starts and a seasonal slowdown in sales of new dwellings.

Hence, mortgage interest rates could

remain relatively stable throughout the third quarter.

II - 3

In bond markets, demands for credit over the summer are
likely to be little changed from recent months and will probably not
be a source of significant upward interest rate pressure.

However,

there could be some upward drift in bond yields in sympathy with
rising short rates

although there is plenty of scope

previous rate relationships

in terms of

for interest rate spreads to narrow.

Monetary aggregates.

M1 grew at a 4.1 per cent annual rate

in June according to preliminary estimates.

For the second quarter

as a whole, M1 expanded at roughly a 5 per cent annual rate, well
below the rate of over 9 per cent realized in the first quarter.
Private demand deposits at both reserve city and country
banks showed unexpected weakness near the end of June and into early
July.

The shortfall at reserve city banks may have reflected at least

in part dollar outflows associated with the floating of the pound and
the subsequent concern over the dollar; foreign central banks absorbed
some of these outflows and invested some of the proceeds in special
U.S. Treasury security issues.

The weakness at country banks was

widespread geographically and thus did not appear to be related to the
recent floods in a number of eastern states.
Expansion in time deposits other than large negotiable CD's
accelerated somewhat further in June, reaching an annual rate of almost
15 per cent.

The acceleration occurred despite a steady upward drift

in yields on competing open-market instruments and brought the June
rate of increase in M2 to just under 10 per cent.

This was a little

ahead of the 8.5 per cent rate recorded for the second quarter as a
whole, but significantly below the rapid 13 per cent pace of the first

quarter.

II - 4

MONETARY AGGREGATES
(Seasonally adjusted changes)

1971
QIV

QIIp

1972
Apr.

May

Junep

3.6

4.1

8.4

9.6

Per cent at annual rates
M1 (Currency plus private
demand deposits)

7.7

9.3

M2 (M1 plus commercial bank
time and savings deposits
other than large CD's)

8.0

13.3

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

9.6

15.5

Adjusted bank credit proxy

9.7

11.3

10.9

10.2

n.a.

11.1

13.5

14.4

5.0

n.a.

Time and savings deposits
at commercial banks
a.

Total

15.9

14.8

15.7

12.4

17.8

16.3

Other than large CD's

14.7

17.1

11.8

7.8

12.6

14.8

-2.1

Billions of dollars 1/
Memorandum:
a.

U.S. Government
demand deposits

-. 4

Negotiable CD's

1.8

-. 1

3.7

Nondeposit sources
of funds

-.3

- .7

1.6

-.2

+.2

p - Preliminary and partially estimated.
1/ Month-to-month and last-month-in-quarter to last-month-in-quarter changes
in averages, not annualized.

II - 5

In contrast to M 1 and M2,

the adjusted credit proxy slowed

its rate of increase considerably in June, growing at a 5 per cent
annual rate.

Given the rapid rates of expansion in the two preceding

months, however, the rate of increase for the entire second quarter-around 11 per cent--was essentially the same as in the first quarter.
A large part of the credit proxy deceleration in June reflected a reduction of more than $2 billion in U.S. Government deposits,
but large negotiable CD's outstanding also expanded less rapidly than
in other recent months.

Following seasonally adjusted increases

averaging almost $1.5 billion in April and May, the growth in such
deposits dropped back to $800 million in June, with most of the growth
coming prior to the middle of the month.

Banks faced sizable CD

maturities over the June tax date, but run-offs over that period were
moderate.
In view of the upward drift of rates on competing market
instruments, banks had to increase CD offering rates over the month.
Rises ranged from over 40 basis points for issues maturing in less than
6 months to slightly less than half that amount for issues maturing
in over a year.
Bank credit.

Total credit at all commercial banks (end-of-

month series) also decelerated significantly in June, showing no
seasonally adjusted increase for the first time since December

1969.1/

This contrasts sharply with the rapid expansion in the preceding month,
even after taking into account the fact that the May increase was

The bank credit estimates are subject to greater than usual
uncertainty this month since they include an adjustment for "window
dressing" between the last Wednesday of the month and June 30.

- 6

inflated by unusual credit movements that biased the end of April figure
downward.

For the second quarter as a whole, this measure of bank

credit increased at just over a 7 per cent annual rate, significantly
below the 15 per cent rate for the first quarter.

COMMERCIAL BANK CREDIT ADJUSTED FOR LOANS
SOLD TO AFFILIATES 1/
(Seasonally adjusted changes at annual percentage rates)

Total loans & investments 2 /

1971
QIV
11.1

QII

1972
Apr.

15.1

7.3

3.6

May

June

18.4

7.7
-3.9
9.9
3.9
5.3
U.S. Treasury securities
-7.6
23.2
4.8
-1.1
16.1
20.1
Other securities
18.8
2.53/
9.4
15.7
8.84/ 5.0
Total loans 2/
-9.810.9
12.0
9.6
-3.4
Business loans 2/
4 .3 '
16.9
18.0
14.2
14.2
14.7 16.6
Real estate loans
12.5
8.5
17.Or
11.7 12.8
13.6
Consumer loans
1/ Last-Wednesday-of-month series.
r - Revised
2/ Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries,
and foreign branches.
3/ June figures have been adjusted to exclude a reclassification of
loans by a major New York City bank.

The weakness in bank credit in June was in securities holdings and in business loans; consumer and real estate loans continued
to grow at a rapid rate.

Holdings of U.S. Government securities were

unchanged after seasonal adjustment, while holdings of other securities
declined moderately.

The weakness in holdings of other securities was

concentrated at banks outside New York City, with holdings of both
short- and longer-term issues showing weaker than seasonal movements.

II - 7

The sharp decline in business loans (at a 10 per cent annual
rate) is particularly striking, following on the heels of five months
of strong growth.

Some easing in June would not have been surprising;

as noted in the June Greenbook, the expansion in business loans since
the beginning of the year has been more rapid than expected in light
of corporate financial positions and the moderate expansion in inventories.

Nonetheless, the shortfall from the growth in preceding months

is far larger than anticipated.
In part, the size of the June decline in business loans may
reflect seasonal adjustment problems, but the drop appears larger than
can be explained on that basis.

A good deal of the decline reflects

a continued lack of vigor at New York City banks, although business
2/
loans were strong there during the first week of July. 2/ In addition,
however, weekly reporting banks outside New York City failed for the
first time in a number of months to more than offset this weakness
with a larger-than-seasonal rise in such loans.

Through the last

Wednesday of June, such banks showed an increase, seasonally unadjusted,
about the same as in the corresponding period last year, when seasonally
adjusted business loans at all commercial banks declined by about $500
million.
An effort was made through the Reserve Bank Contact Group
to uncover the reasons for the unexpected slackening of business loan
growth outside New York City.

Most of the commercial banks contacted,

The June weakness probably explains the lag by several major
New York institutions in following the general increase to 5-1/4
per cent in the prime lending rate late in the month.

II - 8

however, reported no significant slowdown in demand, and where
weakness was acknowledged, it was attributed to a temporary bunching
of repayments or other transitory factors.

In general, continued

strong business loan demand was anticipated in the near future.
The results of such informal surveys must be interpreted
cautiously, of course.

But they do suggest--when considered together

with the performance of business loans in other recent months and the
prospects for increased inventory accumulation in the months ahead-that the June decline in business loans may well reflect transitory
phenomena and that growth in such loans will rebound shortly,
even if not to as rapid a pace as during the first five months of the
year.
Consumer credit.

Consumer instalment credit continued to

expand rapidly in May, providing consumers with additional credit at
a record $17 billion annual rate.

Despite the rapid expansion in

outstandings, consumers' instalment debt is no higher in relation to
disposable income than in most other years since 1966, although it has
risen from the reduced 1971 level.

Similarly,

repayments are no higher

a proportion of disposable income than in other recent years.
New information on interest rates and terms charged consumers
for finance company auto loans indicates that between June 1971, the
first month for which figures were collected, and May 1972, average
interest charges on new car loans declined almost continually.
interest charges on used car loans have been more volatile,

Average

but although

II - 9

rising in recent months, are still below the rates charged last
summer.

During this period loan terms have shown little

evidence of

liberalization--both loan amounts in relation to value of car, and
average maturities, were at approximately the same level this May as
in June 1971.

This new information on rates and terms is being

collected for the Committee on Interest and Dividends, and will be
published monthly.

A summary of the data since June 1971 is given in

Appendix A.

CONSUMER INSTALMENT CREDIT

1966
1967
1968
1969
1970
1971

Repayments as a
percentage of
disposable income

Net increase in
outstandings
(Billions of dollars)

Average Outstandings
as a percentage of
disposable income

$6.2
3.4
9.0
8.3
3.0
8.4

14.4
14.3
14.2
14.7
14.4
13.9

14.9
14.9
14.9
14.9
14.7
14.7

14.3 1/

14.9 1/

1972
Jan

7.6

Feb

11.6

Mar
16.4
Apr
13.2
14.7 2/
14.4 2 /
17.3
May
1/ First quarter.
2/ May as a percentage of projected second quarter disposable income.

- 10

Nonbank financial institutions and mortgage markets. According
to estimates based on sample data, the rate of deposit growth at thrift
institutions rose during June to an annual rate of over 13 per cent-down from the very rapid pace of the first quarter, but still quite

strong.
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)

Mutual
Savings Banks

Savings and Loan
Associations

Both

1971 - QI
QII
QIII
QIV

16.3
15.0
9.6
10.6

24.6
18.4
15.7
13.8

21.9
17.3
13.7
12.8

1972 - QI
QIIe

14.3
10.8

23.4
14.6

20.5
13.4

April

11.7

17.6

15.8

May p/
June e/

9.0
12.0

10.5
14.1

10.0
13.4

p/
e/

Preliminary
Estimated on the basis of sample data.
During the month of May, new mortgage commitments at S&Ls

reached a record seasonally adjusted high.

Moreover,

the ratio of

outstanding mortgage commitments to recent cash flow was higher in
May than it has been recently.
change in

At the same time, there was little net

FHLB advances and the FHLB banks continued to maintain sub-

stantial liquidity.

This strong commitment picture suggests that S&Ls

expect to have ample funds available for mortgages--relying on continued

II - 11

high deposit inflows and mortgage repayments, and if need be, the
availability of funds through the FHLB system.
Despite the strong demand for residential mortgage credit
particularly at S&Ls, rates on home mortgages have been relatively
stable this year.

Recent trade and field reports generally indicate

that originators expect home mortgage rates in the primary market to
change little further, if at all, over the next several months.
However, some mortgage bankers are looking for a near-term rise in
secondary market prices for home loans insured by FHA owing to a shortage
of such mortgages caused by a slowdown in processing at a number of
FHA field offices in an effort to upgrade loan quality.

Anticipation

of higher mortgage prices has led to an increase in the volume of
speculative loan warehousing, despite a further rise in rates charged
on warehousing credit.

Meanwhile, some borrowing has apparently been

shifted from FHA insured to high-ratio conventional mortgages on which
processing is faster than on government-underwritten loans.
In the latest FNMA auction, the average yield on forward
commitments to purchase FHA and VA home loans remained at 7.62 per
cent--uncnanged since the June FOMC meeting.

The amount of offers

increased somewhat, but was still low relative to the volume in the
late spring when mortgage bankers sought to cover their uncommitted
warehoused mortgages in expectation of a decline in mortgage prices.

II -

FNMA PURCHASE AUCTION

1972 - High
Low

Per cent

365 (5/1)

92 (5/1)

69 (2/22)

336 (5/1)
44 (2/22)

of offers
accepted

(points)

(per cent)

42 (3/20)

5.2 (5/1,
5/15)
4.6 (3/20)

7.63 (5/1,
5/15)
7.54 (3/20)

1
15
30

365
266
133

336
188
76

92
71
57

5.2
5.2
5.1

7.63
7.63
7.62

June 12
26

84
98

48
77

58
78

5.1
5.1

7.62
7.62

July 10

135

5.1

7.62

May

NOTE:

Amount of total offers
Accepted
Received
(millions of dollars)

4-month commitments
Private
market
yield
Discount

Average secondary market yield after allowance for commitment fee
and required purchase and holding of FNMA stock assuming prepayment
period of 15 years for 30-year 7 per cent Government-underwritten
mortgages. Implicit yields shown are gross, before deduction of 38
basis point fee paid by investors to servicers.
Long-term securities. Yields on corporate and municipal
long-term bonds continued to rise throughout June; but the rate of
rise moderated in the latter part of the month.

Volume dropped

sharply in the holiday-shortened first week of July and upward yield
pressures moderated.

As of July 8, long-term yields were still

5 to 10 basis points below their April highs.

Anticipation of a

future uptrend in yields and the recent additions to the forward
bond calendar contributed to investor resistance to any attempts by
underwriters to raise prices.

Yields in the long-term Government

market, where dealers had a net short position in securities over 1
year, remained roughly stable.

II -

SELECTED LONG-TERM INTEREST RATES
(Per cent)

New Aaa 1/
Corporate bonds

1/
2/
p/
r/

2/
Long-term
State and
local bonds

U. S. Gov't.
(10-year
constant
maturity)

1971
Low
High

6.76 (1/25)
8.23 (5/21)

4.97 (10/21)
6.23 (6/24)

5.42 (3/26)
6.89 (7/30)

1972
Low
High

6.86
7.42

4.99 (1/14)
5.54 (4/4)

5.87 (1/14)
6.22 <4/21)

Week Ending:
June 2
9
16
23
30

7.09
7.25
7.26
7.31
7.38

5.15
5.31
5.36
5.43
5.43

6.07
6.12
6.10
6.09
6.13 r/

July 7

7.38

5.43

6. 14 p/

(1/14)
(4/4)

With call protection (includes some issues with 10-year protection).
Bond Buyer (mixed qualities).
Preliminary.
Revised.
Stock prices declined throughout much of June as investors
exhibited concern over price developments, international monetary
uncertainties, prospects for tax reform, and other factors.

However,

the average level of stock prices remained almost unchanged from
May to June, and stock prices in early July began to rise.
volume on all major exchanges has been moderate.

Trading

Limited net buying

interest on the part of individuals has been evident in a variety

II - 14

of ways for some months.

At mutual funds, redemptions in May

exceeded sales for the fourth consecutive month, with net sales
amounting to more than $200 million.
Rising bond yields in June discouraged some prospective
issuers, and public bond volume was only slightly over $1.3 billion.

In recent weeks, several financial firms and a few industrials filed
large bond issues, most of which were tentatively scheduled for late

July.

Several, however, have already been accelerated into this

week.

Consequently, the staff estimate of public bond volume for

this month has been raised to $1.7 billion, and August is expected
to be about $1.4 billion.

Both private placements and new equity

issues remain at high levels.
CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1972
1971
Corporate securities total

May e/

June

July -

August

3,758

3,300

3,325

3,400

2,800

Public bonds
Privately placed bonds

2,065
613

1,600
700

1,325
800

1,700
600

1,400
500

Stock

1,080

1,000

1,200

1,100

900

2,680

1,947

2,200

2,000

1,800

State and local government

securities

e/
f/

Estimated.
Forecast.

- 15

Long-term offerings by State and local governments in June
amounted to $2.2 billion, of which about a tenth represented advance
refunding bonds.

These issues were marketed in June in

order to avoid

new IRS regulations with respect to arbigrage bonds which went into
effect on July 1.

II - 16

Short-term security markets. In general, short-term interest
rates have risen 10 to 30 basis points since the June 20 FOMC meeting,
reaching new highs for the year.

In the bill market, longer term bills

have registered larger yield increases than shorter term bills, so
that yield spreads between 3-month and 1-year bills, for example,
widened from about 70 basis points at the time of the last meeting to
around 85 basis points presently.

This suggests that 3 month bills,

currently bid at about 4.13 per cent, may be out of line with other
rates because of temporary supply-demand imbalances generated by
foreign central bank activity and/or because of investor expectations
that short rates will rise more rapidly in coming months.
SELECTED SHORT-TERM INTEREST RATES

June

1972
July 5

July 11

Basis point change
June 21-July 11

Federal funds

4.39 1/

4.61 1/

4.69 2/

Treasury bills
3 month
6 month
1 year

3.97
4.39
4.68

4.08
4.58

4.13

4.98

16
25
30

Federal agency
1 year

5.09

5.37

4.63

4.88

4.88 3/

4.64

Commercial paper

90-119 day

4.75
4.75 3/
4.63
10-89 day CD's
1/ Weekly average.
2/
6-day average.
3/ Latest available data are for June 7.

- 17

With reserve injections needed to reach target paths, the
Desk purchased about $1.1 billion of bills in the two statement weeks
ending July 5.

About one-third of these purchases were directly in

the market and the balance was from foreign central banks that either
needed dollar balances to support their currencies in foreign exchange
markets or were selling bills in order to purchase coupon issues.
In the current statement week, there was a large demand for Treasury
securities from foreign accounts as a result of sizeable dollar outflows from this country.

About half of this demand was accommodated by

investment of funds in Treasury special issues.

The remainder was

satisfied by foreign accounts purchasing $130 million of bills directly
in the market, and, $630 million of bills from the System open market
The System satisfied part of the foreign central bank demand

account.

for bills because of a need to absorb reserves provided by technical
factors, mainly float.
A rise in rates on private short-term obligations--which has
been accompanied by boosts in the prime rate--appears to be related to
moderately tighter conditions in the money market and to some continuing increase in the volume of commercial and finance company paper
coming to market.

Data for May show an increase of around $200 million

over April, with a strong rise in non-bank related directly-placed
paper.

Preliminary weekly data for June seem to show further moderate

increases.

II - 18

COMMERCIAL AND FINANCE COMPANY PAPER 1/
(End-of-month data, in millions of dollars)
May 1972 net change from
April 1971
December 1971
249

217

Total commercial and finance paper

Bank related
26
-177
426
191
related
Nonbank
63
60
Dealer placed
Directly placed
131
489
1/ Combines seasonally adjusted nonbank related paper and seasonally
unadjusted bank-related paper.

Federal finance.

Final figures are not yet available for the

fiscal year just completed, but the budget deficit is expected to be
$3 to $4 billion below the official June 5 estimate of $26 billion.
A more precise estimate of the budget deficit in fiscal 1972 cannot be
made now, largely because we do not know whether the planned acceleration of payments on the last days of the fiscal year was completely
carried out (and recorded) in fiscal year 1972.

In any case, very

little economic significance can be attached to such a speed-up in
payments.
With respect to fiscal 1973,

staff calculations indicate

that the Administration estimate (Mid-Year Budget Review of June 5th)
of a $27 billion deficit is probably still attainable despite Con-

gressional action on various expenditure bills and also taking into
account recent pronouncements on the cost of accelerated activity in
Vietnam.

Staff projections now indicate that in fiscal 1973 Federal

receipts and expenditures may be about $3.0 billion higher than
estimated by the Administration on June 5,

and about $1.0

higher than

II -

estimated by the staff in the June Chart Show.

On the expenditures

side our estimate of the incremental cost of the stepped-up air war
in Vietnam has been increased $0.5 billion to a $2.5 billion level,
in line with recent statements by the Director of OMB.

The Administra-

tion's June budget estimate made no provision for this item.

Our

estimate of outlays also has been raised as a result of enactment of a
bill extending for six months a program that provides 13 weeks of
additional unemployment benefits.

Several other bills are pending that

would, if enacted, further increase staff estimates of outlays.
The recently enacted social security measure, which includes
a 20 per cent general benefit increase effective September 1 but with
payments not beginning until October and a boost in social security
taxes effective January 1, 1973, has increased staff estimates of
both Federal receipts and expenditures by $2.0 billion in calendar 1972.

However, the increase in benefits has no effect on our estimate of
total outlays in fiscal 1973. While the increase is much larger than
the 12-1/2 per cent previously assumed by the staff, the measure, as
enacted, did not contain two benefit provisions previously incorporated
in staff projections:

(1)

the widows benefit and other liberalization

measures proposed by the Administration which cost $1.4 billion
annually, and (2) an earlier effective date and a retroactive (to July 1)
payment.

Unlike the general social security benefit increase, the lib-

eralization measures were not separated from HR-1, the social securitywelfare reform bill

that is

not expected to be enacted in

affect fiscal year 1973 outlays.

time to

The staff estimate of fiscal 1973 receipts is $3.0 billion
above the Administration June 5 estimate mostly because of our higher
income assumptions.

In addition, the social security tax increase

has raised our fiscal 1973 receipts estimate by about $0.5 billion.
Because of the delay in the increase in social security
benefits, our high employment budget figures now show a smaller shift
toward deficit in the third quarter of this year than previously
estimated.

On a half-year basis, however, the outlook has not changed

significantly as our projection continues to show a sharp shift toward
deficit in the second half of this year and again in the first half of
calendar year 1973.
The end-of-June cash balance at the Treasury was nearly $10
billion, about $2.2 billion above the level projected in the June
Greenbook.

Apparently, receipts in June were considerably higher and

expenditures somewhat lower than projected.

In addition, the balance

was unexpectedly increased in late June and early July by the purchase
of $1.5 billion of special Treasury issues by foreign central banks.
The present staff projection assumes the Treasury will raise about
$1.0 billion in July and August through additions to the weekly bill
auctions and another $1.0 billion by sale of remaining Treasury bills
previously acquired from the German central bank in an exchange of
special issues for marketable issues.

No further market borrowing is

expected in July but, assuming no additional foreign purchases of special
issues, the Treasury is expected to borrow as much as $3.0 billion in
the market in August, perhaps in conjunction with the quarterly refunding.

Net Treasury borrowing for the current half-year is still

expected to be large, perhaps $16 billion.

II - 21
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

June
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Other (debt repayments, etc.)
Plus:

Other net financial sources a /

Plus:

Budget surplus or deficit (-)

Equals:

-3,0
- .4
-3.0
-1.2

Aug.

Sept.

2,1
.6

3,1

3.0

1.0

1.6

1.5

-. 3

-.3

-. 4

-.4

1.0

-6.3

3.2

b/ -4.6

Change in cash balance

Memoranda:

July

-3.3

2.6

-.6

4.3

Level of cash balance
end of period

10.1

5.5

4.9

9.2

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

25.7
22.5

14.8
21.1

18.4
21.7

23.9
21.3

Maturing coupon issues
held by public
Net agency borrowing

l.1
.6

2.3
.2

Checks issued less checks paid and other accrual items.
Actual
This maturity was redeemed in cash.

1.8
.5

II -

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

Calendar.Quarters
Fiscal 1972 e/ Fiscal 1973 e/
Mid-year F.R. Mid-year F.R.

Review

Board

Review

Board

F. R. B. Staff Estimates
1973
1972

Calendar
Year

1972 1/

II III

federal Budget
(Quarterly datn, unadjusted)
Surplus/deficit

-10.5

-26.0

-22.5

-27.0

-21.3

Receipts

207.0

208.7

223.0

226.0

224.0

48.1

67.5

57.0

51.4

51.3

66.4

Outlays

233.0

231.2

250,0

253.0

245.3

58.6

61.1

64.1

61.5

64.3

63.1

Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 2/

6.4

-7.1 -10.1 -13.0

3.3

n.a.
n.a.
n.o.

19.8
-1.3
4.0

n.a.
n.a.
n.a.

22.6
3.1
1.0

13.5
3.3
4.3

3.9
3.6
3.0

-5.7
-2.4
1.7

5.9
.9
.2

9.4
1.2
-.6

8.3
2.7
2.0

-1.0
-1.7
-.6

Cash operating balance, end of period n.a.

10.1

n.a.

7.0

8.0

7.7

10.1

9.2

8.0

5.3

7.0

n.a.

4.9

n.a.

n.e.

i.e.

1.4

n.a.
f.a.
n.a.

-20.7
212.5
233.2

f.a.
n.a.
n.a.

-29.3
232.7
262.0

-20.0
227.8
247.8

ht.a.

4.3

f.a.

-12.1

-.8

Memo:

Not agency borroing3

.9 n.e.

n.e.

National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
Expenditures

-13.2 -17.0 -21.8 -27.8 -31.6 -36.2
222.2 226.8 227.6 234.6 235.9 232.5
235.5 243.8 249.4 262.4 267.5 268.7

High employment surplus/deficit
(NIA basis)

9.2

-1.8 -11.0 -15.8 -19.8

*Actual
e--projected
n.e.--not estimated
n.a.--not available
1/ Estimated by F. R. Board Staff.
2/ Includes such items as deposit fund accounts and clearing accounts.
3/ 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.

INTERNATIONAL
DEVELOPMENTS

7/12/72
U.S.

III -- T - 1
Balance of Payments

In millions of dollars; seasonally adjus-ed
1971
YearP

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

Year
727

Mar.*
.

Remittances and pensions
Govt. grants & capital, net

-1,529
-3,937

-387
-802

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other
Nonbank-reported claims -- liquid
"
"
"
other

-9.781
-4,765
-909
-566
-2,372
-506
-664

-2.879
-994
-388
-518
-764
-175
-40

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. Govt.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches
Other private foreigners
Intl. & regional institutions

-5.036

1.280

Other nonliquid liabilities
Reserve liab. to foreign official institutions
U.S. monetary reserves (increase, - )
Gold stock
Special drawing rights 3/
IMF gold tranche
Convertible currencies
Errors and omissions
BALANCES (deficit -) 3/
Official settlements, S.A.
"
"
, N.S.A.
Net liquidity, S.A.

Apr.*

May *

-1,147

-2,689 -1,673
42,770 11,809
-45,459 -13,482
526
3,416

-67
849
1,161
272
-6.691
-6,908
(-4,942
-465
682
-560

/
19722
1V

-335
679
309
78
528
438
(-238)
61
29
21

-610
3,865
-4,475

-631
3,849
-4,480

3,711
-4,439

-46
-174
-367
-137

57
320
-185
67

-60
-110
124

273

-5
58
(331)
-1
-6?

908
974
<437)
40
-106

416

-728

(-44)
42
-28

27,417

2,848

1,011

282

3,065

607

-15

-44

-4
64

7
195
-217

-4
-40

468
1,350

381
-10,928

-510

480

-3,455
- 3 .258

-1 071
-267
554
-3,290
-755
"
-1,562
"
-3 A-.Z
, N.S.A.
075-22 719
Liquidity, S.A. 4/
-3,983
"
1,066 1-1,175
138
- N.S.A.
-23.791 -3.824
adjusted.
are
seasonally
* Monthly, only exports and imports
1/ Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ Excludes allocations of SDRs as follows: $717 million on 1/1/71 and $710 million

on 1/1/72.

4/ 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 situation of calm in foreign exchange markets and the
surplus in the U.S. official settlements balance that had prevailed
since mid-March changed abruptly in mid-June.

A large-scale move-

ment out of sterling reduced U.K. net reserves by about $2-1/2 billion
in a few days and forced a decision to float the pound in order to
avoid further large drains.

Uncertainty in the exchange markets than

focussed on the dollar, as the viability of the Smithsonian Agreement
was questioned by some.

Between June 15 and July 12 major foreign

central banks other than the Bank of England and the Bank of Italy
bought $3.6 billion against their own currencies.

The principal gainer

of reserves was the German Federal Bank, which added $1.7 billion to
its holdings of dollars and is still to receive about $1-1/4 billion

in dollars and about $1/2 billion in gold and SDRs from the Bank of
England in repayment for the sales of DM in support of the pound.

The depreciation of sterling since June 14 amounts to
about 6 percent.

The speculative attack was triggered by several

specific events, but it also reflected a market judgment (apparently
shared by the U.K. authorities) that the exchange rates for sterling
against other currencies established in the Smithsonian meetings
were inappropriate, or would soon become so, in view of economic
trends in Britain and the problems connected with entry into the

III - 2

Common Market.

Market participants did not appear to have comparably

strong doubts about the viability of other exchange rate relationships.
Barriers against inflows of capital were quickly strengthened in some
countries -- particularly in Switzerland -- and by the end of the
first week in July the market appeared to be less convinced that furthechanges in exchange rates in the near future should be expected.
Although reserve gains by foreign central banks have tapered
off, the persisting forward market premiums for major foreign
currencies against the dollar, as well as the high level of gold
prices, indicate the existence of continuing doubts about stability
of exchange rates.

There is little in prospect for the U.S.

balance of payments to bring renewed confidence in the dollar in
the months ahead, such as existed in the mid-March to mid-June
period after U.S. money market rates moved up relative to European
rates.

Although improvement in the trade balance from the $8 billion

annual rate of deficit in April-May is projected, the basic
balance -- i.e., the balance on current account and long-term
capital -- is likely to be in a deficit in the third quarter at
an annual rate of perhaps $10 billion, compared to a first quarter
rate of nearly $13 billion.

Exchange rates for other currencies

are likely to press against their ceilings, and foreign central banks
will probably have to add further to their dollar reserves.

However,

if expectations of further revaluations of the stronger currencies

III - 3

are not renewed in the months ahead and if a reflow of funds to the
United States resumes, the size of the U.S. official settlements deficit
could again be moderated.
Foreign exchange markets.

Exchange market conditions have

been chaotic for most of the past four weeks, with sterling floated,
European and Japanese markets closed for several days and then re-opened
under a welter of new exchange control measures, and the dollar coming
under heavy selling pressure.
The sterling crisis began on June 15, apparently triggered
by a wildcat dock strike.

Sterling had begun to come under pressure

in the forward market a week or so earlier in response to official
warnings and semi-official forecasts of the effect of accelerating
British wage and price inflation on that country's balance of payments.
The situation was aggravated by a statement by U.K. shadow Chancellor
of the Exchequer Healey on June 19 predicting a sterling devaluation
by July or August.

In the six trading days from June 15 to June 22,

the U.K. used $2.6 billion equivalent of reserves in market support
operations.

Nearly all of this intervention was in EC currencies

under the Community's narrow band arrangement.

The effect of the

intervention in EC currencies was to move the "snake" lower in the
"tunnel".

Dollar exchange rates for the German mark, the French franc,

and the Belgian franc on June 22 were as much as 1 percent below their
rates on June 14.

III - 4

After the U.K. announced the float on the morning of
June 23, rates for the stronger EC currencies jumped to their

dollar ceilings, and European central banks purchased 1.15 billion of
dollars before withdrawing from their markets.

During the next few

days, with major European and the Japanese markets closed, several
of the European currencies and the yen traded well above their
upper limits in the New York market, while the Italian lira traded
below its floor.
Following intensive deliberations by the EC finance ministers

and central bank governors, EC exchange markets officially re-opened
on June 28, with the Smithsonian margins still maintained but with some
modifications in the EC narrow band arrangement.

Denmark dropped

out of the snake temporarily, while Italy was allowed to use dollars
rather than Community currencies to keep the lira in the snake.
Germany and Italy announced new exchange control measures to reduce the
inflows and outflows, respectively, from those two currencies.
(See pp. III-16 below.)

From June 28 to July 15, EC central banks

purchased, net, around $900 million, including Bank of Italy sales of
just under $400 million.
The Japanese market re-opened on June 29, and the Swiss
market on July 3.

Switzerland had introduced new exchange

restrictions while that market was closed, and imposed even more
severe controls following the National Bank's purchase of a large
amount of dollars on July 3.

(See pp. III-19.)

III - 5

FOREIGN CENTRAL BANK INTERVENTION
June 15-July 12, 1972
(millions of dollars or equivalent, partly estimated)

In
Dollars
U.K.
Germany
France
Netherlands
Belgium
Italy
Switzerland
Japan
Canada
Total

In
Sterling

Total
-2,644
+3,455
+855
+291
+240
-400
+538
+760
+13
+3,108

-2,514*
+1,800
+464
+86
+164
------

-130
+1,655
+391
+205
+76
-400
+538
+760
+13
+3,108

* U.K. liability to other EC countries for sterling support
operations in EC currencies.

Toward the end of the period under review, the pressure
on the dollar had abated somewhat, though rates for most major
foreign currencies remained near or at their dollar ceilings.
Three-month forward rates for the EC currencies -the Swiss franc, and the yen were still

except the lira --

above the upper limits on the

spot rates by as much as one percent, indicating a residue

uneasiness in the markets.
Sterling,

after moving as low as 241.00, has recovered to

around 245.00, 6 percent below its old parity.
sterling has settled around 240.00.
in the New York market for U.S.

One-year forward

The FRBNY purchased £7-1/2 million

Treasury account since June 26.

III - 6

Euro-dollar market.

Euro-dollar interest rates in most

maturities reached their highest levels of this year immediately
following the announcement of sterling's floating on June 23; on
that date one- and three-month Euro-dollar deposits reached 6 percent;
the rates for these maturities had been about 4.7 and 4.9 percent
respectively, only a few days before.

Rates in most maturities

declined in the last few days of June but advanced on balance in
the first week of July when large amounts of funds moved into
various Continental currencies.

(See Foreign Exchange Markets).

In recent days one- and three-month Euro-dollar deposits have been
at about 5.1 and 5.3 percent, respectively.
The overnight Euro-dollar rate declined in the two weeks
through July 5, despite firmer rates in the longer maturities and
the fact that Federal funds rates were rising.

The relative ease

in the overnight market in that period may reflect the fact that
U.S. banks were reducing their borrowings so as to avoid incurring
required reserves in the Euro-dollar reserve requirement computation
period which ended July 5.

Gross liabilities of U.S. banks to

their foreign branches increased by about $500 million from June 7
to 21 but declined by about $950 million (to $0.8 billion) from
June 21 to July 5.

Available data indicate that on a daily average

basis the banks' Euro-dollar positions changed little from the
previous computation period.

III

SELECTED EURO-DOLLAR AND U.S.

Average for
month or

(1)
Over-

(2)

(3)

MONEY MARKET RATES

(4)
1-month

(5)
30-59 day

(6)

week ending

night

Wednesday

E_'co-$1/

Funds21

1972 - Mar.
Apr.
May
June

3.87
3.92
3.79
4.09

3.83
4.17
4.27
4.46

0.04
-0.25
-0.48
-0.37

(1.01)
(0.73)
(0.47)
(0.65)

5.05
4.72
4.25
4.82

3.80
4.44
4.21
4.50

1.25
0.2?
0.04
0.32

(2.51)
(1.46)
(1.10)
(1.53)

June 14 4.15
21 4.12
28 3.75

4.46
4.39
4.49

-0.31
-0.27
-0.74

<0.73)
(0.76)
(0.90)

4.60
4.69
5.55

4.41
4.61
4.66

0.19
0.08
0.89

(1 34)
(1.25)
(2.28)

July

4.61
4.65

-1.04 (0.15)
-0.35 (0.73)

4.84
5.09

4.74
4.74

0.10
0.35

(1.31)
(1,52)

5
12

3.57
4.30

Fede-al

Diffe-enti:l

(1)-(2) (*)

T--o-$

Deposit!

CD -ca
/

Diffe:ential

)_4.-< (*)

AdiV.'

1/ All Euro-dollar rates are noon bid rates in the London market; overnight rate adjusted for technical factors to reflect the effective cost of
funds to U.S. banks.
2/ Effective rate.
3/ Offer rates (median, as of Wednesday) on large denomination CD's by
prime banks in New York City; CD rates adjusted for the cost of required
reserves.
*/ Differentials in parentheses are after adjustment of Euro-dollar
rates for the 20 percent marginal reserve requirement (relevant to banks
with borrowings in excess of their reserve-free bases).
p/ Preliminary.
Balance of payments.

Until mid-June it appeared that the

United States might register a small surplus on official settlements
in the second quarter, despite a worsened trade balance.

However,

the attack on sterling and the heavy speculative outflows from the
United States that took place in the rest of June -- and persisted
until the end of the first week in July -- resulted in a June deficit

III - 8

of more than $1 billion.

Consequently, the second quarter deficit

on official settlements, seasonally adjusted, was probably somewhat
over $1 billion.
Flows of long-term private capital were possibly more
favorable than in the first quarter.

In that quarter, reported net

outflows by U.S. corporate investors were at an annual rate of
$3-1/2 billion, not much below the average in 1971; in the second
quarter, as sales of bonds by U.S. corporations in foreign markets
were at a record annual rate of over $3 billion, such net outflows
were probably smaller.

Also, the first-quarter outflows of funds

through U.S. affiliates of Japanese trading companies, amounting to
nearly $1/2 billion, probably ended in the second quarter.

On the

other hand, foreign net purchases of U.S. corporate stocks amounted
to only about $200 million in the second quarter, down from $680
million in the first.
Bank-reported claims on foreigners (short and long-term)
were reduced by $370 million in April-May, and weekly data suggest
some further decline in the first half of June.

However, during

the exchange crisis in the second half of the month, such banking
claims increased by $300-400 million, according to these data.
The basic deficit resulting from current account and longterm capital transactions in the second quarter was probably not
significantly changed from the first quarter annual rate of $13 billion,

III - 9

so far as can be judged from partial data now available.

Since the

second quarter over-all deficit on the official settlements basis
is estimated at a $4 to $5 billion annual rate, very large inflows
of short-term capital in various forms must have been under way
until the middle of June.
Present expectations are that the trade balance and net
receipts from services will be improving gradually over the rest
of the year, but the unexpectedly high trade deficits of April and
May force an upward revision of the estimated deficit on goods and
services for the year as a whole to about $3 billion.

The comparable

balance last year was a surplus of $0.7 billion.
U.S. foreign trade.

The U.S. trade deficit in May fell from

the exceptionally large figure of the preceding month as exports rose
while imports showed little change from the high values of March and
April.

For the two months of April-May the trade deficit was $8

billion at an annual rate (balance of payments basis).

This compares

with a deficit rate of $6-3/4 billion in the first quarter.
While total imports have varied only slightly since February,
a shift in their composition has occurred.

Imports of some industrial

materials are stronger, imports of foods turned up, while imports of
nonfood consumer goods (other than automobiles) have declined in the
last two months.

However, imports of automobiles, both from Canada

and other sources, have continued to rise along with the increase in
total U.S. car sales.

Although sales of foreign cars (other than

III - 10

from Canada) in terms of units are a smaller proportion of total
U.S. car sales this year, the value of imports has continued to
rise, reflecting a build-up in inventories of foreign cars, higher
prices, and a shift to purchases of the more expensive models.
The rise in imports of industrial materials until May was
mainly in lumber

and petroleum,

as housing starts remained high,and

domestic requirements for petroleum expanded.

In May imports of

industrial materials were further strengthened by a resumption of
heavy arrivals of steel; steel imports had dipped in March-April.

can be expected that imports of other types of industrial materials
will also rise with the projected accelerated growth of the domestic
economy in the second half of this year.

Higher imports of these

materials may more than offset any further reduction in imports of
consumer goods which were exceptionally large in the early months
of this year.

Therefore, the overall level of imports may be rising

in the coming months.
Exports since January have shown a greater month-to-month
variation than imports, but on average, there has been little
evidence of growth.

The April-May average level of $45-1/2 billion

at an annual rate was slightly below the February-March level (January
exports were unusually high because of a makeup in shipments delayed
by dock strikes).

The value of shipments of agricultural commodities

has remained high because of higher prices for cotton and soybeans

III - 11

related to supply limitations and increased sale of corn to the
U.S.S.R. under the $175 million purchase agreement of last year.
The new grain agreement with the U.S.S.R. provides for sales of
$750 million of grain over a three-year period and should help
sustain the level of exports of agricultural commodities during
the remainder of the year at close to the high April-May value.
Exports of nonagricultural commodities -- other than
commercial aircraft and automotive equipment to Canada -- have
changed little since January and have not yet responded to the
upturn in economic activity in foreign industrial countries.
Exports of machinery have been virtually flat since January,
although foreign orders for U.S. machinery had increased gradually
In May foreign orders for

from mid-1971 through April of this year.

machinery fell off sharply, but the volatility of the series makes
it uncertain whether this drop was significant.

Shipments of non-

agricultural industrial materials -- chemicals, coal, metals, -- in
April-May were below the average level of shipments in February-March.
Shipments of automotive equipment to Canada, principally parts
for assembly in cars to be returned to the United States, have been increasing successively every month this year.

The rise reflects not only higher

U.S. car sales but also a further shift to Canada of the production of fastselling models.

Exports of commercial aircraft have generally displayed

their typical erratic monthly movement; the averagevalue of such shipments
in the first five months of this year was higher than the projected value
of aircraft deliveries in the second half.

CONFIDENTIAL (FR)

III-12

Balance of payments and related developments in major
industrial countries.

The recent turmoil in the foreign exchange

markets does not appear to be justified by significant changes
in the balance of payments of leading foreign countries, with
the exception of the United Kingdom.
The heavy selling of sterling which initiated the foreign
exchange crisis in mid-June was triggered by concern over labor
problems in Britain.

The decision to float the pound shortly

thereafter, on June 23, reflected not only the need to stop the
heavy drain on Britain's foreign exchange reserves but also
awareness by the British authorities that balance of payments
movements augured badly for the pound.

The surplus on current

account -- in this case a good indicator of underlying balance
of payments conditions -- had diminished very sharply since mid-1971,
with the re-emergence of a large trade deficit, in spite of persistent high unemployment.

It seemed clear that further recovery of

the domestic economy would cause a substantial current account
deficit.

In addition, entry into the Common Market on January 1, 1973

will put further pressure on the British external payments position.
The flight from sterling -- and after the float of sterling,
the weakening of the dollar as well -- put strong upward pressure
on the currencies of several countries, most notably the mark and the

CONFIDENTIAL (FR)
yen.

III-13

With the Japanese current account expected to remain in

substantial surplus, despite its sizable revaluation against
other currencies last December, the rush into yen is not surprising.
In Germany, however, the current account has declined to a
position of approximate balance, before the economy has returned
to full employment and before the revaluation has exerted its
full effects on the balance of payments.

Thus the anticipation of

another revaluation implicit in the speculative inflows into marks
does not seem well grounded.
Other currencies experiencing upward pressure include the
French, Belgian and Swiss francs, and the Dutch guilder.

In the

case of France, the demand for francs has occurred despite the
emergence of a current account deficit, which is expected to widen
this year.

And demand for the Dutch guilder remains strong despite

relatively high rates of inflation in the Netherlands.
The Canadian dollar strengthened briefly as the U.S.
dollar weakened immediately following the floating of the pound.
However, with that one exception, the Canadian dollar has been
drifting downward since mid-June, mainly under the influence of
lower interest rates in Canada.

The decline in sterling may also

have contributed, Britain being Canada's second largest export
customer.

CONFIDENTIAL (FR)

III-14

Currencies, other than the pound and the U.S. and Canadian
dollars, which have shown weakness in recent weeks include the lira
and the Danish krone.

In Italy, the current account remains com-

fortably in surplus, but capital outflows have been taking place
mainly because of pessimism over the political and economic outlook.

The Danish deficit on current account was significantly

reduced in the first quarter and the authorities are optimistic
enough about the balance of payments outlook to be trying to hold
the present parity of the krone.

In contrast to the British, the

Danes expect immediate benefits to their balance of payments from
entry into the Common Market next year.
Of the countries whose currencies have been in strong
demand lately, Germany, Japan and Switzerland have adopted new
measures to curb capital inflows, in order to protect the parities of
their currencies and, in the case of Germany and Switzerland,
to soak up liquidity which is jeopardizing the success of their
anti-inflation compaigns.

Germany for the first time imposed

direct capital controls, precipitating the resignation of Minister
of Economics and Finance Schiller.

Germany's precedent-breaking

action implies a move toward acceptance of the principle of a
regime of direct controls in the Common Market, as long advocated

by the French authorities.

CONFIDENTIAL

(FR)

III-15

The weak currency countries have taken steps to halt

capital outflows.

The British, in addition to floating sterling,

raised Bank rate and extended controls on capital outflows to include the countries of the Sterling Area.

The Danish central bank

also raised its discount rate and announced it would restrict
lending to commercial banks.

Italy announced the suspension of

convertibility of Italian bank notes remitted by foreign banks.
The decision to float the pound on June 23 following
two weeks of heavy speculative selling of sterling reflected
recognition that British reserves would be exhausted very soon.
Beyond this compelling consideration, the British authorities
probably believed that the pound was or soon would be overvalued
and that capital controls and other restrictive measures could
not preserve the $2.60 parity indefinitely.

There had been a

sharp decrease in the current account surplus, from a high of

almost $900 million in the third quarter of 1971 to less than $100
million in the first quarter this year, due largely to a shift
in the trade balance from surplus to deficit.

Distortions were

caused by the U.S. dock strike and the U.K. coal miners' strike,
but a substantial trade deficit continued in April and May.

The

sharp rise in imports this year appears to be associated with the
upturn in U.K. economic activity.

The drop in exports in 1972 below

the levels in the last nine months of 1971 may reflect declining
competitiveness of British goods.

British export prices, in sterling,

have been rising rapidly -- by more than 8 per cent from first quarter
1971 to first quarter 1972.

CONFIDENTIAL (FR)

III-16

The key to the balance of payments outlook -- and to the
new parity of the pound ( the British have promised that the float
is only temporary) --

is the domestic cost situation.

If, as now

seems likely, the Confederation of British Industry and the Trades
Union Congress reach an understanding whereby the CBI members
agree to continue their voluntary price restraint policy, a new
parity of $2.50 might be established, representing a devaluation of
not quite 4 per cent.

If, on the other hand, wages and prices are

allowed to spiral upward unchecked, a more substantial devaluation -to $2.40, for example -- might be necessary.

The capital account of the British balance of payments
has also deteriorated this year, but this reflects mainly the end
to the speculative short-term inflows in 1971.
The German current account was approximately in balance
in the first four months of 1972, as continued large surpluses on
trade account were offset by deficits on services and transfers.
Last year there was a surplus of over $200 million in JanuaryApril.
The overall balance registered a surplus of $1.3 billion in
January-April this year, down sharply from last year's DM $3.2
billion surplus for the same four months.

This year's surplus is

mainly explained by a large positive errors and omissions item,
probably reflecting heavy unrecorded capital inflows, and an

CONFIDENTIAL (FR)

III-17

unusually large surplus on long-term capital account.

The bulge

in the capital account is associated with a surge in the purchase
of fixed interest DM securities by nonresidents.

Purchase of such

securities by nonresidents may have been one way of circumventing
the so-called Bardepot law, which went into effect March 1 and
which requires that some percentage, up to 50 per cent, of the
proceeds of loans to German non-bank enterprises by nonresidents
be deposited, interest free, with the Bundesbank.
The fact that the current account has been reduced to
approximate balance this year, before the full impact of the revaluation has been felt and while the economy is still operating
at less than full employment, suggests that the mark is hardly
undervalued at this point.

Nevertheless, the recent weakness of

the pound and the dollar has triggered a new speculative inflow
into marks.
At the end of June the German authorities adopted several
measures to slow this inflow, in order both to mitigate upward
pressure on the mark and to absorb the liquidity which the inflow
was causing.

The most noteworthy measure taken was a prohibition

on sale of bonds to nonresidents without permission of the Bundesbank.
This represents a marked departure from previous German practice of
avoiding direct capital controls.

The use of such controls has long

been favored by the Bundesbank, which sees them as rendering monetary

CONFIDENTIAL (FR)

policy more effective.

III-18

On the other hand, direct controls were

opposed by Minister of Economics and Finance Schiller, who subsequently resigned in large part because of their adoption.
The authority for the restriction on bond sales is provided for in Article 23 of the External Economy law of 1961.

This

article grants the government broad powers to restrict capital
inflows of all kinds by administrative action.

One of the arguments

against using Article 23 -- aside from general objections to capital
controls -- was that it should be invoked only in return for concessions from Germany's common market partners, notably France and
Belgium, who have been urging Germany to impose capital controls.
It should be noted that the controls the Germans have
instituted are not comprehensive.

For example, no restrictions

were placed on nonresidents'purchase of equities or of bonds issued
by nonresidents.
The other measures taken at the end of June included raising
the deposit requirement under the Bardepot law from 40 to the legal
maximum of 50 per cent.

In addition, the Bundesbank raised reserve

requirements on both domestic and foreign liabilities of the commercial banks and lowered the banks' rediscount qu tas.
The French balance of payments, as measured by changes in
official reserves and the external position of commercial banks,
was in deficit in the first quarter by $424 million

Information

CONFIDENTIAL (FR)

III-19

on the banks' position beyond the first quarter is not available, but
the reserves, after showing virtually no change in April and May,
apparently increased by over $600 million in June and early July, as
the Bank of France intervened in the market to buy dollars.

Before

the sterling float the Bank of France was also purchasing pounds.
The current account during the first five months of 1972
was probably slightly in deficit, with the trade account known to
have been approximately in balance and invisibles thought to have run
their customary deficit.

The prospect of continued trend growth in

the economy during the rest of the year -- about 5 per cent, annual
rate -- makes it likely that the deficit will widen.
Despite the deficit on current account, the French franc,
judging by the Bank of France's recent support operations, has proved
attractive to speculators.

It is clear, furthermore, that France's

network of exchange controls and the dual franc rate have not proved
fully effective against unwanted capital inflows, which have lifted
France's external reserves from less than $6 billion in mid-1971 to
about $9 billion.
The current account of the Swiss balance of payments apparently registered a small surplus in 1971 -- final figures have not yet
been published -- as it did in 1970.

The $100 million surplus in 1971

(as estimated by the OECD) was the result of a substantial surplus on
invisibles more than offsetting a deficit on trade account.

With the

CONFIDENTIAL (FR)

III-20

economy fully employed and with inflation no worse than in most other
European countries, the balance of payments outlook appears favorable.
The Swiss have adopted several measures in recent days to
choke off the flow of speculative funds into Swiss francs.

June 27, a ban was imposed on sales of securities and of real property
to nonresidents.

On July 5, a 2 per cent per quarter tax was imposed

on increases over June 30 levels in nonresident Swiss franc deposits
in Swiss commercial banks.

In addition, Swiss banks were prohibited

from maintaining a net liability position in foreign exchange and
non-bank enterprises were required to obtain permission from the Swiss
National Bank to borrow from nonresidents.
From June 23 until July 3, the Swiss National Bank refrained
from intervention in the exchange market, thereby allowing the Swiss
franc to float --

at times above its upper limit.

The strenuous efforts to curb the inflow into Swiss francs
are part of the Swiss authorities' drive to moderate domestic inflation.

Large-scale capital inflows greatly expand bank liquidity and

thereby work against this drive.

Inflation intensified in 1971 and

early 1972, when consumer prices increased at an annual rate over 6 per
cent -- compared to a 10-year average rate of 3.5 per cent.
The current account of the Dutch balance of payments in the
first quarter of 1972 was in substantial surplus -- for the third quarter
running.

These surpluses reflect partly the Dutch mini-recession, but

CONFIDENTIAL (FR)

III-21

also the terms of trade effect following the revaluation of the guilder.
The recent substantial rise in exports probably shows also an underlying strength in the Dutch competitive position, despite the relatively
high rates of inflation of the past several years.
The overall balance of payments has been in substantial surplus, well in excess of the current account surplus, because of large
short-term capital inflows.

Restrictions on purchases of Dutch long-

term securities by foreigners appear to have been successful in
moderating inflows on this account, but banks have been increasing
their foreign liabilities instead.
The balance of payments of the Belgium-Luxembourg Economic
Union was in deficit by over $70 million in the first four months of
1972, compared with a surplus of $150 million during the same period
in 1971.
The current account, however, remains in surplus, though it
declined somewhat during 1971 as export demand slackened.

The

decrease was not unwelcome, as economic policy has been aimed at
reducing the current account surplus by transferring resources from
foreign to domestic use.
The deficit on the overall balance of payments stemmed mainly
from substantial capital exports by firms and individuals, reflecting
primarily direct Belgian investment abroad.
Because of the strength of the current account -- and also
because of Belgium's ample official net foreign assets, which totalled

CONFIDENTIAL (FR)

III-22

$3.6 billion at the end of April -- the Belgian franc has been a very
strong currency, one considered a likely candidate for revaluation.
This has put considerable upward pressure on the Belgian franc and
has prompted action by the authorities to ward off speculative capital
inflows.

Their actions have included successive reductions in the

Belgian National Bank's discount rate, from 7 1/2 per cent in October
1970 to 4 per cent in March 1972, and institution of a dual foreign
exchange market last year.
The Italian balance of payments has weakened somewhat in
1972 after recording large surpluses in the preceding two years.
In the first four months of 1972 the overall balance was in deficit
by about $190 million, though a surplus of $130 million would have
been recorded but for debt prepayments in January and February.

The

deterioration in the balance of payments has been entirely the result
of capital outflows, the current account having shown a surplus of
about $550 million in January-April.
Because the utilization of resources is likely to continue
to be at a lower level in Italy than in her main trading partners,
Italy's current account will probably remain strong.

But capital has

been moving out of Italy because of political uncertainties and the
general malaise of the economy, reflecting steeply rising unit labor
costs, shrinking profits, business pessimism, a slump in private investment and the possibility that upcoming wage negotiations may again
result in highly inflationary settlements.

CONFIDENTIAL (FR)

III-23

Increases in exports of Italian banknotes have been the
major source of the increased capital outflow.

The government acted

in late June to discourage such exports, by suspending the convertibility of lira balances credited to foreign banks for remittances of
Italian banknotes.
The current account of the Danish balance of payments improved markedly in the first quarter, the deficit being reduced to
$57 million from about $100 million in the fourth quarter and about
$200 million in the first quarter of 1971.

The improvement stemmed

mainly from a sharp decrease in the trade deficit.

The 10 per cent

surcharge on imports imposed last year has contributed to the improvement, but it is feared that, with the surcharge to be gradually
reduced and ultimately removed in April 1973, imports may climb
rapidly.
The Danish authorities, however, feel that the outlook for
the balance of payments is sufficiently bright so that a devaluation
of the krone -- which has been under pressure during the foreign
exchange crisis of recent weeks -- is not called for.

To help

defend the krone and take the heat out of domestic demand, the
Danish Nationalbank raised its official discount and rediscount
rates from 7 to 8 per cent on June 27 and announced that it would
restrict its lending to commercial banks.

Fiscal policy may also be

tightened through cuts in government expenditures.

CONFIDENTIAL (FR)

III-24

The government also announced on June 27 that it had withdrawn from its agreement with the EEC of May 1 to limit fluctuations
of the krone with respect to other EEC currencies to 2 1/4 per cent.
But it will adhere to the Smithsonian agreement by limiting fluctuations to 2 1/4 per cent on either side of parity.
The Bank of Japan announced a discount rate reduction from
4 3/4 to 4 1/4 per cent on the same day the pound was floated.

Sub-

sequently, certain exchange controls were tightened to hold down
capital inflows.

The recently established marginal reserve require-

ment on increases in "free yen" deposits by foreigners was raised from
25 to 50 per cent.

The control on bank purchases of export bills was

extended to smaller transactions than before.

Foreign exchange con-

versions to yen in advance of securities purchases were prohibited.
Official reserves declined during April-June by $800 million,
to $15.8 billion.

The decline reflected repayment of foreign liabili-

ties and increases in foreign assets of banks.
Although the basic balance of payments has continued in
surplus, monthly surpluses have declined since February, reflecting
some diminution of the surplus on trade account.

In May heavy pay-

ments for leasing of foreign ships were necessitated by the prolonged
seamen's strike in Japan.
Exports stabilized in February-April and declined slightly
in May.

Imports, on the other hand, have been rising slightly, with

CONFIDENTIAL (FR)

III-25

the result that the monthly trade surplus declined from about $400
million in February-March to about $310 million in April-May (as
seasonally adjusted by Japan).
Continuing net long-term capital outflows reflect increased
Japanese purchases of foreign securities, sharply smaller foreign
purchases of Japanese securities than last year, and a net outflow
of "other" unspecified long-term capital.

A- 1

APPENDIX A:

INTEREST RATES ON AUTOMOBILE LOANS AT FINANCE COMPANIES

At the request of the Committee on Interest and Dividends,
the Federal Reserve Board has started to collect information on
interest rates and other terms on automobile loans made by finance
companies.

This information will be published monthly in the new

Statistical Release G.11, which complements the interest rate data
on auto loans of banks already available in Statistical Release (G.10).
Back data has been obtained from the finance company respondents so
that the first release, issued July 10, contains data for a full year.
The figures in the report (reproduced on next page) are weighted averages
of new and used auto instalment contracts purchased from automobile
dealers by major automobile finance companies.

A - 2
FINANCE RATES AND OTHER TERMS ON NEW AND USED CAR INSTALMENT CREDIT CONTRACTS
PURCHASED FROM DEALERS BY MAJOR AUTO FINANCE COMPANIES

Customer rate
(Per cent per annum)
New
Used
Average

Period

Juhe
July
August

September
October
November
December

Average maturity
(months)
New
Used
Average

Average amount
financed
(dollars)
New
Used
Average

16.26

13.25
13.24
13.27
13.26
13.06
13.08
13.14

35.0
35.0
35.0
34.9
34.8
34.8
34.8

28.6
28.5
28.3
28.1
29.4
29.2
28.9

33.4
33.4
33.3
33.2
33.5
33.4
33.3

3,045
3,059
3,039
3,041
3,052
3,054
3,089

1,624
1,611
1,578
1,559
1,622
1,632
1,632

2,476
2,495
2,474
2,505
2,557
2,534
2,515

16.17
16.27
16.32
16.40
16.47

13.09
13.06
13.02
13.00
13.01

34.9
34.9
35.0
35.0
35.0

29.2
29.2
29.1
29.1
29.0

33.5

3,014
3,018
3,029
3,058
3,075

1,645
1,645
1,645
1,648
1,668

2,447
2,456
2,482
2,521
2,561

12.13
12.10
12.11
12.10
12.06
12.06
12.11

16.62
16.69
16.78
16.77

12.07
11.99
11.92
11.87
11.86

16.08
16.16

Ratio of amount
financed to wholesale value
(per cent)
New
Used
Average

1972
January
February
March
April
May
Note:

33.5
33.5
33.5
33.5

97
98
99
99

100

Rates are reported on an annual percentage rate basis as specified in the Federa i Reserve Board Regulatioa
(Truth-in-Lending). Data on the amount financed exclude finance charges.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 18, 1972 : Greenbook

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