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CONFIDENTIAL (FR)
July 14, 1976
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
By the Staff
Board of Governors
of the Federal Reserve System
TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS
Page
II
Retail sales..................................................
Industrial production........................................
Nonfarm payroll employment....................................
1
3
4
4
Unemployment rate...........................................
Personal income............................................... 4
4
Private housing starts.......................................
Manufacturers' inventories.................................... 8
Nondefense capital goods...................................... 12
14
State and local spending...................................
Federal cash outlays..........................................
Private nonfarm hourly earnings index.........................
Capacity utilization.........................................
Wholesale prices.............................................
Consumer price index......................................
14
15
15
18
20
TABLES:
Retail sales.................... ..............................
Auto sales .............................................
Nonfarm payroll employment....................................
Selected unemployment rates...................................
2
2
5
6
Unemployment rate............................................
Personal income..............................................
6
7
New private housing units....................................
9
.....
... ........
Home sales.................................
Business inventories.........................................
Inventory ratios..............................................
New orders received by manufacturers..........................
Construction contracts for commercial
and industrial building....................................
10
11
11
13
Hourly earnings index ........................................
Materials capacity utilization...............................
.....................
Consumer prices...................
Wholesale prices.............................................
Federal sector accounts......................................
16
17
19
19
22
13
TABLE OF CONTENTS
Continued
Section
DOMESTIC FINANCIAL DEVELOPMENTS
Page
III
Monetary aggregates and bank credit...........................
Business finance..............................................
Other securities markets.....................................
3
7
9
Mortgage market and consumer credit...........................
12
TABLES:
Selected financial market quotations.......................... 2
Monetary aggregates .........................
.. ...............
5
Commercial bank credit...................................... . 8
Security offerings............................................ 10
Interest rates and supply of funds
for conventional home mortgages at
selected S&L's.............................................. 13
Secondary home mortgage activity.............................. 13
Consumer instalment credit.................................... 15
INTERNATIONAL DEVELOPMENTS
IV
Foreign exchange markets......................................
U.S. banks' foreign branch activity...........................
U.S. international transactions..............................
Exports......................................................
Agricultural exports..........................................
Nonagricultural exports.......................................
Nonfuel imports..............................................
Bank-reported claims on foreigners............................
Data on private securities
transactions................................................
Foreign official assets......................................
U.S. reserve assets...........................................
World commodity prices.......................................
Monetary conditions in major
foreign countries...............................
1
3
7
8
8
8
9
9
10
10
10
11
. .......... 15
TABLES:
Assets and liabilities of foreign
4
branches of U.S. banks......................................
U.S. merchandise trade, BOP basis............................ 7
Trade volume................................. ................. 7
The Economist commodity
price index................................................. 12
TABLE OF CONTENTS
Continued
Section
TABLES:
Page
IV
Three-month and long-term interest
rates in selected industrial
countries...................................................
Growth of the money stock in major
industrial countries.......................................
16
18
II --
July 14, 1976
T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Period
Release
Date
Data
Per Cent Change From
Three
Preceding
Periods
Year
Period
Earlier
Earlier
(At Annual Rates)
Civilian labor force
Unemployment rate (per cent)
Insured unemployment rate (%)
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)
June
June
June
June
June
June
7-2-76
7-2-76
7-2-76
7-2-76
7-2-76
7-2-76
94.6
7.5
4.5
79.0
June
June
7-2-76
7-2-76
36.1
4.83
June
May
7-2-76
6-29-76
Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Material
May
May
May
May
May
Consumer prices (1967=100)
Food
Commodities except food
Services
18.9
60.1
1.1/
7.3-,
3.9 l/
2.2.
4.3-
4 .3 /
7.5,
4.3 1 '
1.8
.5
2.2
8.71/
6.7-
.4
-3.5
1.6
3.5
4.4
3.2
36.3
36.2
4.83'
4.77-
4.51-
40.2
150.1
40.21
40.21
39.31/
3.2
6.5
1.4
6-15-76
6-15-76
6-15-76
6-15-76
6-15-76
123.2
133.9
123.8
78.9
123.8
8.8
9.9
19.7
10.7
10.8
7.9
5.8
11.3
-1.0
12.7
11.9
10.5
7.7
-4.6
18.0
May
May
May
May
6-22-76
6-22-76
6-22-76
6-22-76
169.3
180.6
155.3
178.8
7.1
11.4
7.0
5.4
Wholesale prices (1967=100)
Industrial commodities
Farm products & foods & feeds
June
June
June
7-9-76
7-9-76
7-9-76
182.4
180.5
187.5
Personal income ($ billion)2/
May
6-16-76 1357.2
36.01/
4.8
2'.7
4.7
6.4
6.1
4.7
5.0
8.4
6.5
3.6
16.9
5.3
6.0
4.5
9.8
5.4
6.4
3.0
9.4
11.5
(Not at Annual Rates)
6-30-76
6-30-76
6-30-76
6-30-76
50.0
13.8
11.7
2.1
4.5
1.0
1.6
-2.3
11.2
10.5
9.4
17.4
26.4
15.4
13.7
26.2
May
May
May
7-14-76
6-30-76
7-14-76
1.46
1.58
1.34
1.45
1.471
1.621
1 62
1.31-1
1.321
1.871
1.3
1.30-
May
6-30-76
.838
.845 -
.844-
.824-
Retail sales, total ($ bil.)
GAF
June
June
7-9-76
7-9-76
54.0
13.2
2.7
3.0
1.2
-1.0
11.1
6.9
Auto sales, total (mil. units)2/
Domestic models
Foreign models
June
June
June
7-5-76
7-5-76
7-5-76
10.5
9.1
1.4
4.5
7.1
-10.3
1.6
2.2
-2.2
20.7
29.3
-16.7
Housing starts, private (thous.) 2 /
Leading indicators (1967=100)
May
May
6-16-76
6-29-76
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries
Nondefense
Defense
Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade
Ratio:
1/
Mfrs.' durable goods inventories to unfilled orders
Actual data.
2/
At Annual rate.
1,415
109.2
1.58-!
2.5
1.4
/
-8.5
3.1
30.4
13.0
II
- 1
DOMESTIC NONFINANCIAL DEVELOPMENTS
There have been further signs of a moderating pace of economic
growth of late, but an upturn in consumer spending suggests that the
advance of business activity should soon pick up again.
Growth in
production and employment slowed substantially in June as a result of
the recent weakness in retail sales and a build-up of nondurable goods
inventories earlier this year.
Most seriously affected were production
and employment in nondurable goods manufacturing.
This rapid adjustment
to rising stocks has kept inventories from ballooning, and retail sales
picked up briskly in June, following the May decline.
Price and wage
developments continue to be generally favorable, but increases for fuel
and metal products pushed wholesale industrial prices up more in June
than in other recent months.
Consumer sales appear to have broken out of their recent
slump in June.
The advance estimate indicates that total retail sales
rose 2.7 per cent, on a seasonally adjusted basis, with all major
categories of stores participating in the gain.
occurred in the automotive group.
The largest increase
Even excluding autos, the monthly
advance in sales was greater than 2 per cent.
Sales at stores in the
GAF group (general merchandise, apparel, and furniture and appliances)
were up 3.0 per cent in June.
In view of the recent cutback in
employment and production by nondurable goods manufacturers, the sharp
advance in nondurable goods sales--2.2 per cent--is most encouraging.
Sales at food stores and apparel stores were up well over 1 per cent;
in addition, sales at gasoline stations and general merchandise stores
were up 2.3 and 4.0 per cent, respectively.
II - 2
RETAIL SALES
(Seasonally adjusted, percentage
change from previous period)
1975
III-IV
1976
1976
May
April
Mar.
June
IV-I
I-II
2.2
3.3
1.7
1.4
.7
-2.1
2.7
(1.0)
(3.0)
n.a.
(1.5)
.3
-2.9
n.a.
Total, less auto and
nonconsumption items
1.6
1.9
1.1
2.0
-.6
-1.0
2.1
GAF
2.8
1.4
-.1
2.1
-3.1
-.8
3.0
Durable
4.4
6.4
3.2
3.7
-4.4
3.7
Auto
4.9
8.7
5.3
-1.8
5.3
-4.8
6.1
Furniture and
appliances
5.1
1.0
2.0
2.4
-.1
-1.0
1.0
1.2
1.9
1.0
2.1
-.8
-.9
2.2
.7
2.8
-3.0
.3
-6.2
2.6
1.6
Food
1.0
2.0
.7
1.3
-1.0
.8
1.3
General merchandise
2.7
1.1
.1
2.4
-3.1
-1.7
4.0
-1.2
3.0
.2
-.2
-1.3
2.3
Total sales
(Real*)
Nondurable
Apparel
GasoliAe
.0
.8
Deflated by an unpublished Bureau of Economic Analysis price measure.
AUTO SALES
(millions of units; seasonally adjusted annual rates)
1975
III
IV
1976
I
Jan.
9.2
9.2
10.1
9.6
Imports
1.7
1.3
1.3
Domestic
7.5
7.9
Large
4.3
Small
3.2
Total auto sales
1976
Feb.
Mar.
Apr.
10.2
10.4
10.5
10.0
1.2
1.4
1.4
1.5
1.5
1.4
8.7
8.4
8.7
8.9
9.0
8.5
9.1
4.4
5.1
4.9
5.1
5.4
5.5
5.2
5.5
3.6
3.5
3.5
3.6
3.5
3.4
3.2
3.6
May
June
10.5
II - 3
Revised sales figures for April now show a gain of 0.7 per cent,
rather than the slight decline previously indicated.
However, the
preliminary figure for May shows a sharper decline than reported earlier.
The net result for the second quarter as a whole is an increase in sales
of 1.7 per cent--about half the first quarter growth rate.
Much of the
quarters' strength came from the automobile group, and an abnormal
decrease in auto scrappage rates in the year ending last July suggests
that replacement demand should continue strong in the near future.
Excluding autos and nonconsumer items, the second quarter gain was 1.1
per cent, down from a 1.9 per cent rise in the first quarter.
The advance in the newly revised industrial production index is
tentatively estimated to have slowed to 0.3 per cent in June--probably
reflecting repercussions of the weak retail sales in May and earlier
industrial build-ups of nondurable goods inventories.
Increases in the
output of durable materials and business equipment were partially offset
by weakness in consumer nondurables and nondurable materials.
Auto
assemblies rose by 1.9 per cent in June, and recently announced production
schedules call for further increases in the current quarter.
Industrial production in the second quarter increased by 7.4 per
cent at a compound annual rate--a considerable moderation from the 12.6
per cent increase of the first quarter.
However, the second quarter did
show a more rapid increase in production of business equipment, which
accelerated from a 7.9 per cent annual rate rise in the first quarter to
9.7 per cent in the second.
The new June index is estimated to be
about 16 per cent above its low of March 1975 and only 1-1/2 per cent
below its pre-recession high.
II - 4
The recent slowing in the pace of industrial expansion has been
paralleled by sluggish employment growth.
Nonfarm payroll employment
(adjusted for strike activity) was unchanged in June after little growth in
May.
Thus, two stagnant months have followed five months of vigorous
expansion.
The recent weakness is most apparent in nondurable manufacturing
where widespread cutbacks caused about 50,000 jobs to be lost in the
last two months--more than 100,000 including those on strike in the rubber
industry.
So far there is little discernible spillover to other
industries from this strike.
The vigorous increases in durable manufacturing
employment evident between last November and April have also tapered off.
Overall, only 40 per cent of private nonfarm industries increased
employment in June--the lowest proportion in a year.
The seasonally adjusted unemployment rate rose 0.2 per cent to
7.5 per cent in June, reflecting some growth in the civilian labor force
and a decline in total household employment.
However, problems with
seasonal adjustment continue to distort the picture.
This years
seasonal adjustments appear to have exaggerated the decline in unemployment earlier this year and the subsequent June rise.
Current dollar
personal income continued to rise vigorously in May despite the strikediminished growth of manufacturing wage and salary disbursements.
A slow rate of advance continues in the residential construction
sector.
Private housing starts rose by only 2-1/2 per cent in May to a
seasonally adjusted annual rate of 1.42 million units, and for the second
quarter as a whole starts will probably average only slightly above the
1.4 million rate of the first quarter.
The improvement in May was
II -
(In
5
NONFARM PAYROLL EMPLOYMENT
thousands; seasonally adjusted)
Average Monthly Change
Total
(Strike adjusted)
Construction
Manufacturing
(Strike adjusted)
Durable
Nondurable
Trade
Services and Finance
Total Government
State and Local
June 75Nov. 75
Nov. 75Apr. 76
Apr. 76June 76
246.2
(238.8)
277.8
(279.6)
12.5
( 47.5)
Apr.May
1.0
(95.0)
MayJune
24.0
( 0.0)
3.4
-2.0
-3.0
8.0
-14.0
76.4
(80.0)
98.2
(98.2)
-36.0
(-12.5)
-17.0
(45.0)
-55.0
(-70.0)
25.2
51.2
69.4
28.8
17.5
-53.5
40.0
-57.0
-5.0
-50.0
26.6
72.6
56.8
52.2
86.8
71.0
19.8
26.0
5.0
43.5
0.5
7.0
-9.0
29.0
-3.0
0.0
19.0
58.0
4.0
14.0
II - 6
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1974
June
1976
May
1975
May
June
April
June
5.3
8.9
8.7
7.5
7.3
7.5
3.5
5.1
16.3
7.2
8.4
20.3
7.0
8.2
20.7
5.4
7.3
19.2
5.6
6.8
18.5
6.0
7.1
18.4
Household Heads
Married Men
3.0
2.5
6.1
5.7
6.1
5.5
4.8
- 3.9
4.8
4.0
5.1
4.4
White
Negro and other races
4.8
9.2
8.3
14.2
8.0
14.0
6.7
13.0
6.6
12.2
6.8
13.3
State Insured*
3.3
7.0
6.7
4.2
4.3
4.5
Total
Men, 20 years and older
Women, 20 years and older
Teenagers
* Per cent of covered workers under regular State programs.
NOTE: May 1975 was the specific high for the total unemployment rate.
Unemployment Rate
1975
Dec.
Adjusted by:
1976 seasonal factors
1975 seasonal factors
8.3
Jan.
Feb.
1976
Mar.
Apr.
May
June
7.8
7.6
7.5
7.5
7.3
7.5
8.0
7.8
7.7
7.7
7.5
7.4
II
- 7
PERSONAL INCOME
(Per cent change from preceding period, compound annual rate; seasonally adjusted)
Nov. 73July 75
July 75May 76
Mar. 76Apr. 76
Apr. 76May 76
Current Dollars
Personal Income
Wage and Salary
Disbursements
Private
Manufacturing
Transfer Payments
7.7
11.0
9.6
10.3
5.6
11.3
10.7
10.8
4.6
12.3
12.0
11.7
1.3
14.8
13.2
24.4
8.1
-9.6
8.5
10.9
7.8
8.0
-12.2
15.2
88.7
117.8
-2.5
5.5
4.2
2.7
-4.4
5.7
5.3
3.2
-1.7
5.3
2.6
.6
-20.5
9.4
79.5
102.9
8.0
-3.7
Addenda:
Total Nonfarm Income
Total Farm Income
Constant Dollars*
Personal Income
Wage and Salary
Disbursements
Addenda:
Total Nonfarm Income
Total Farm Income
* Deflated by the consumer price index, seasonally adjusted.
NOTE: November 1973 was the specific high and July 1975 was the specific
low for deflated wage and salary disbursements.
II - 8
concentrated in the multifamily sector.
high despite some slippage in May.
Single-family starts remain
Total residential building permits
rose a bit further in May to their highest level in two years.
Though
they are no longer rising, existing home sales remained quite high in
May.
The more volatile series measuring new home sales fell sharply
in May; it is likely that part of the decline reflected seasonaly
adjustment problems.
The book value of total manufacturers
inventories rose at a
$12.5 billion annual rate in May after having fallen at a $0.3 billion
rate in April.
The increase for the two months together was in line with
the $6.3 billion rate of rise of the first quarter.
Durable stocks
resumed the accumulation seen in the first quarter after a slight April
runoff.
Nondurable goods inventories also rose substantially in May
adding to the accumulation of the first quarter.
Despite the inventory accumulation in May, the inventoryshipments ratio for manufacturers was unchanged.
Thus, the slowdown
in industrial production in May and June (especially in nondurable
manufacturing) seems to reflect a continuation of conservative policies
designed to keep stocks in line with shipments.
Inventories at all
stages of processing--materials and supplies, work-in-process, and
finished goods--rose in May.
The book value of wholesale trade
inventories also rose sharply in May--by $9.9 billion, at an annual rate.
Retail inventory data for May are not yet available, but the sharp decline
in retail sales that month could indicate an unintended build-up in
this sector as well.
II -
9
NEW PRIVATE HOUSING UNITS
(Seasonally adjusted annual rates, in millions of units)
1975
Per cent change in
May from:
Year ago
Month ago
QII
QIII
QIV
QI(r)
1976
Apr.(r)
.90
1.05
1.05
1.24
1.04
1.26
1.04
1.28
1.06
1.37
1.04
1.28
1.13
1.40
1.05
1.30
1.10
1.38
1.06
1.26
1.16
1.42
n.a.
n.a.
+
+
+
-
6
2,
1
9
+27
+30,
- 2,
+ 1
Single-family
Permits
Starts
Under construction 1/
Completions
.65
.83
.52
81
.74
.95
.53
.91
.77
1.03
.56
.91
.84
1.12
.59
.97
.81
1.06
.60
.98
.82
1.06
n.a.
n.a.
+
+
-
1
1i
1
4
+25
+24,
+16,
+25
Multifamily
Permits
Starts
Under construction 1/
Completions
.25
.22
.53
.43
.30
.31
.51
.37
.29
.33
.48
.37
.29
.28
.46
.33
.28
.32
.46
.28
.34
.36
n.a.
n.a.
+20
+13
-- *
-24
+33
MEMO:
Mobile home shipments
.20
.22
.23
.27
.24
.26
+10
+25
All units
Permits
Starts
Under construction 1/
Completions
May(p)
Per cent changes in April.
*
1/ Seasonally adjusted, end of period.
NOTES:
Per cent changes based on unrounded data.
indicated by --
Change of less than 1 per cent
+54,
-19
-39*
II - 10
HOME SALES
New Homes Sales and Stocks
Homes
Months'
Homes
Sold 1/ for sale 2/ supply
(thousands of units)
Median Prices
of Homes Sold
Sales Indexes of Unit Volume
Existing
(1972=100, seasonally adjusted) New
homes
Existing
homes
New
(thou. of dollars)
homes
homes 3/
1975
QI
QII
QIII
QIV
438
554
564
637
395
379
384
378
10.8
8.2
8.2
7.1
61
77
79
89
93
105
111
126
38.1
39.0
38.8
41.2
33.8
35.4
36.1
35.6
609
384
7.6
85
121
42.8
36.6
610
660
641
389
381
378
7.7
6.9
7.1
85
92
89
122
126
131
40.7
41.1
42.1
35.4
35.7
35.8
573
679
574
628
514
379
384
389
394
399
7.9
6.8
8.1
7.5
9.3
80
95
80
87
72
116
122
124
124
125
41.6
42.7
43.7
43.7
43.2
36.3
36.2
37.2
37.7
37.6
1976
QI (r)
1975
Oct.
Nov.
Dec.
1976
Jan.
Feb.
Mar.
Apr.
May
(r)
(r)
(r)
(p)
1/ Seasonally adjusted annual rate.
2/ Seasonally adjusted, end of period.
3/ Converted to 1972 index for comparison with existing home sales, which are not
available on any other basis.
II -
11
BUSINESS INVENTORIES
(Change at annual rates in seasonally
adjusted book values, $ billions)
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail
Auto
II
-18.8
-12.5
-4.3
-8.2
1975
III
5.4
-6.6
-8.6
2.0
IV
-1.3
.6
-3.5
4.2
I
19.3
6.3
1.8
4.5
1976
Apr.
11.6
-.3
-.7
.4
May
n.a.
12.5
5.3
7.2
-6.3
-2.7
-3.6
-1.7
11.9
3.1
8.8
5.5
-1.9
-2.0
.1
.3
13.0
5.0
8.0
-.5
11.9
5.1
6.8
-.4
n.a.
9.9
n.a.
n.a.
I
1976
Apr.
May
INVENTORY RATIOS
(Book values)
1973
I
1974
I
1975
I
Inventories to sales:
Manufacturing and trade
Manufacturing
Durable
Nondurable
1.47
1.60
1.91
1.23
1.49
1.63
2.05
1.18
1.66
1.92
2.50
1.32
1.48
1.63
2.09
1.15
1.45
1.58
2.01
1.13
n.a.
1.58
1.99
1.14
Trade, total
Wholesale
Retail
1.34
1.20
1.42
1.35
1.10
1.52
1.42
1.26
1.57
1.33
1.19
1.42
1.32
1.18
1.42
n.a.
1.21
n.a.
Inventories to unfilled orders
Durable manufacturing
.802
.699
.803
.846
.845
.838
II - 12
New Commerce data recently became available on constant dollar
inventory/sales ratios through the first quarter of the year.
Viewed
in these terms, manufacturing and trade inventories are higher relative
to sales than the book value ratios had indicated.
The reason for the
difference is that a large proportion of inventories is recorded in book
values at
old prices which bias the value of the stock downward in periods
of inflation.
In real terms, nondurable manufacturing and nondurable
wholesale inventories appear to be at about a normal level in relation to
sales.
The nondurable retail inventory-sales ratio is low relative to
trend, but not as low as the book value ratio suggests.
The durable
manufacturing and wholesale trade constant dollar ratios appear to be
somewhat high by historical standards, while the ratio for durables at
retail is a bit low in historical perspective.
The outlook for business fixed investment remains positive.
orders for nondefense capital goods rose 1.6 per cent in May.
New
This series
now has risen for five consecutive months and stands above the December
1975 level by 15 per cent in current dollars and by about 13 per cent
in real terms.
In constant dollars, orders are still a fourth below their
previous peak.
New orders for nondefense capital goods slightly exceeded
shipments in
May, so that unfilled orders rose for the first time in
nineteen months.
Contracts data--a leading indicator of nonresidential construction
investment--suggest that the recovery in this area continues to be concentrated in the nonbuilding components.
While the value of such construction
contracts are 18 per cent above their monthly average for 1975, contracts
for manufacturing and commercial buildings have yet to show any strength.
Building contracts (measured in square feet of floor space) were relatively
unchanged in April and May, and thusfar in 1976, the monthly average of new
contracts is only equal to the depressed level of 1975.
II - 13
NEW ORDERS RECEIVED BY MANUFACTURERS
(Seasonally adjusted; percentage change from preceding period)
1975
QIII
QIV
1976
QI
Jan.
7.3
6.7
1.0
-1.6
7.0
5.5
1.9
.7
0.6
-1.3
1.6
.1
May 1975
to
May 19762/
Feb.
1976
Mar.
Apr.
May
.8
.3
4.2
4.0
6.5
5.9
-.1
-.3
4.5
4.1
26.4
19.5
1.9
1.2
3.5
3.0
2.6
2.3
5.0
4.5
1.6
1.3
13.7
7,6
Total Durable Goods
Current Dollars
1967 Dollars 1/
Nondefense Capital Goods
Current Dollars
1967 Dollars 1/
1/ FR deflation by the appropriate wholesale price index.
2/
Per cent change, not at a monthly rate.
CONSTRUCTION CONTRACTS FOR COMMERCIAL AND INDUSTRIAL BUILDING
(Seasonally adjusted percentage change from preceding period)
1975
Total
/
Commercial
Industrial
Feb.
1976
Mar.
Apr.
May 1975
to
May May 1976
QIII
QIV
1976
QI
-4.1
.6
-8.6
-24.1
7.5
31.4
-.7
1.3
22.2
-1.
-8.0
4.5
11.8
.9
-13.4
-9.2
-30.4
.7
24.3
12.3
-4.7
-8.7
25.0
4.9
-6.8
20.9
15.0
Jan.
1/ Components are seasonally adjusted by FR and may not add to total which is
seasonally adjusted by Census.
II - 14
Government purchases have added only modest strength to the
recovery in recent
months.
Indicators of state and local spending
have sloed down after several months of healthy increases.
to preliminary estimates,
According
state and local employment has grown very
little during May and June.
Furthermore, the value of construction
put-in-place declined in June on a seasonally adjusted basis.
Never-
theless, the underlying fiscal position of the sector is improving
as the recovery brings in much needed revenues.
Recent Treasury
outlays--particularly
Department data suggest that Federal cash
for defense and income maintenance--ere
weak in the final months of fiscal year 1975.
unusually
Federal
spending on a unified budget basis is now expected to be about $368
billion,
roughly $4 billion below the level forecast by the Adminis-
tration in
late May and $7 billion under the Congressional
budget target.
This decline in outlays partly reflects
support payments.
However,
it
lower income
also may have been due to legislation
permitting government agencies to carryover into the third quarter
unobligated balances which usually expire at the end of a fiscal
year--a one-time measure to facilitate
the transition to the new
fiscal year starting date, October 1.
Much of the expenditure
shortfall should be made up in
the current
(transition) quarter,
as agencies attempt to spend the allocated funds before the new
fiscal year begins.
In
addition,
income support payments will be
boosted beginning in July by a 6.4 per cent cost-of-living increase
for social security recipients.
II -
For fiscal 1977,
15
outlays and the deficit are now forecast
at $410 billion and $57 billion, respectively--both
below the levels in
the last
Greenbook.
about $2 billion
Downward adjustments
in
income security and interest payments suggested the revision in
spending.
year 1977.
Federal receipts are projected at $353 billion for fiscal
The staff
continues to assume that
last
year's
tax
reductions will be permanently extended once Congress resolves the
issue of tax reform.
difficult
However,
no revenue
gains from
reform have been projected, given current legislative uncertainties.
On a full
employment budget basis,
to indicate a shift toward restraint.
deficit
in
calendar year
1976,
the full
our projection continues
After registering a $6 billion
employment budget moves close
to balance during calendar year 1977.
Overall
inflationary pressures have been less than
Wage increases continued to be moderate during
generally expected.
the second quarter
index,
of 1976.
which excludes
the effect of interindustry
ment and overtime pay in
3.3 per cent in
second quarter.
The private nonfarm hourly earnings
manufacturing,
rose
June and at a 6.3 per cent rate
However,
earnings
shifts
employ-
at an annual rate of
from the first
could easily escalate
second half of the year when there will
in
in
to the
the
be more new wage settlement
activity as well as numerous deferred and cost of living increases.
The capacity utilization
series
been expanded from 15 "major materials"
for materials which has
to all
96 materials
in
the
II -
16
HOURLY EARNINGS INDEX*
(Per cent change from preceding period, compound
annual rate; seasonally adjusted)
Private Nonfarm
Construction
Manufacturing
Trade
Services
Transportation &
Public Utilities
*
1975
QIII QIV
QI
OII
June 75June 76
Dec. 75June 76
8.6
6.6
8.6
8.7
7.3
8.3
4.4
8.3
6.4
10.6
6.4
4.8
6.8
4.7
8.3
6.3
8.6
6.2
5.5
5.9
7.0
6.0
7.2
5.8
7.5
6.4
6.9
6.5
5.7
6.7
3.3
7.2
5.7
-0.6
3.7
12.9
11.7
8.1
7.9
9.7
8.8
3.7
1976
May 76June 761/
Excludes the effects of interindustry shifts in employment and fluctuations
in overtime pay in manufacturing.
1/ Monthly change at an annual rate,
not compounded.
II
- 17
Materials Capacity Utilization
1973
Qtr. High
Total materials
1975
Qtr. Low
1976
QIp
QIIe
92.9
70.6
78.9p
80.2
92.3
64.4
73.1
75.4
97.5
67.2
73.5
--
94.0*
70.0
85.7
85.2
94.1
68.0
85.2
--
Textile materials
94.6
60.9
85.7
Paper and pulp
99.5
73.4
89.8
Chemical materials
92.7
67.2
83.8
--
94.1
84.3
85.3
85.4
Durable goods materials
Basic metal material
Nondurable goods materials
Textile, paper, chemical materials
Energy materials
First Quarter 1974.
- 13
II
index of industrial production, was at a rate of about 80 per cent
in the second quarter.
This compares to 92.9 per cent at the
cyclical high in the fourth quarter of 1973.
that prices
These data suggest
do not seem to be threatened by lack of capacity to
produce materials
in
most of the areas where bottlenecks
previously occurred.
have
The present rate of utilization does, however,
represent a significant recovery from the cyclical low of 70.6 per
cent in the second quarter of 1975.
employment,
nd inventory behavior,
between the ratios
As with industrial production,
where exists a sharp contrast
of capacity utilization
nondurable materials industries.
in
the durable
and
Utilization in durable goods
material plants is estimated at 75 per cent in the second quarter,
but should be rising as equipment production expands and durable
inventories increase.
goods materials
The spurt in the production of nondurable
early in the year brought its capacity utilization
to 85 per cent in
the second quarter
Wholesale prices
adjusted,
industrial
increased by 0.4 per cent
not at an annual rate)
commodities
of 1976.
from May to June
accelerated
and food products moderated.
(seasonally
as prices
while price increases
Industrial
of
for farm
commodities were up [0.5]
per cent,
largely reflecting higher prices for steel mill products,
gasoline,
and machinery and equipment.
The third consecutive monthly
rise for farm and food products--0.4 per cent in June--reflected
increases for manufactured animal feeds, soybeans, cotton, and
II
-
19
CONSUMER PRICES
(Per cent changes at annual rates; based on seasonally adjusted data)1
All items
Food
Commodities (nonfood)
Services
Relative
importance
Dec. 75
Dec. 74
to
Dec. 75
Dec. 75
to
Mar. 76
Mar. 76
to
Apr. 76
100.0
7.0
2.9
5.0
7.1
24.7
38.7
36.6
6.5
6.2
8.1
-7.9
2.9
10.6
6.7
3.9
5.4
11.4
7.0
5.4
68.1
4.5
2.7
6.7
10.1
14.2
7.7
-15.7
6.4
6.6
-5.9
2.6
Apr. 76
to
May 76
Memo:
All items less food
and energy2/3/
Petroleum products2/
Gas and electricity
6.6
7.9
13.1
Not compounded for one-month changes.
Estimated series.
Energy items excluded: gasoline and motor oil, fuel oil and coal, and
gas and electricity.
WHOLESALE PRICES
(Per cent changes at annual rates; based on seasonally adjusted data)1/
Relative
importance
Dec. 75
Dec. 73
to
Dec. 74
Dec. 74
to
June 75
June 75
to
Oct. 75
Oct. 75
to
Mar. 76
Mar. 76
to
June 76
May 76
to
June 76
100.0
20.9
0.5
11.7
0.0
6.6
5.3
Farm and food products
22.8
11.0
-5.6
16.9
-14.1
18.0
4.5
Industrial commodities
Excluding fuels and
related products and
power
Materials, crude and
intermediate2/
77.2
25.6
3.0
9.9
5.3
3.6
6.0
66.9
22.5
2.6
6.6
7.2
3.6
8.4
48.3
28.2
2.0
8.4
6.2
4.3
8.9
All commodities
Finished goods
Consumer nonfoods
18.6
20.5
3.8
11.3
3.2
2.3
7.5
Producer goods
11.8
22.6
8.7
8.6
6.5
3.3
4. r
5.0
10.6
-13.8
16.8
lemo:
13.0
11.1
Consumer foods
1/ Not compounded for one-month changes.
T/ Ectimated series.
-11.0
II - 20
coffee and cocoa.
vegetables,
Declines for cattle, meats, fresh fruits and
and sugar were partially offsetting.
Prices at the early stages of processing rose rapidly in
June.
Crude materials
(excluding food)
rose 1.4 per cent,
higher prices for natural gas (lagged 2 months)
reflecting
and scrap metals.
The index of nonfood intermediate materials increased 0.7 per cent
Nonfood
as steel mill, plywood, and textile products moved up.
consumer finished goods rose by 0.6 per cent, and the producers
finished goods index was up by 0.4 per cent.
On the consumer front, prices rose by 0.6 per cent from
April to May on a seasonally adjusted basis.
This increase in the
consumer price index was more rapid than previous months this year
when food and gasoline prices dampened the over-all rise in the
index.
During the first quarter declines in these items held the
rise in consumer prices to a 3 per cent annual rate.
energy items are excluded,
the
If food and
May rate of rise is close to the
rates of the past 12 months.
Meats were responsible for most of the May increase in
prices, reflecting earlier rises in livestock prices.
food
Since live-
stock prices have not been increasing since April, meat prices are
not likely to rise much in the next month or two.
rose again in
May,
and price increases in
Coffee prices
commodity markets and at
the wholesale level suggest continued further pressures.
Over the
past year coffee prices have risen by 35 per cent, representing
about 16 per cent of the total advance in the index for food.
II
- 21
Nonfood commodity prices were also up in May.
Gasoline
prices reversed their earlier 1976 declines, and apparel and other
nondurable increases were larger than those of recent months.
cars rose another 2 per cent from April to May.
price increases continued to moderate in
the smaller rises in
the medical component
mortgage interest rates.
Conversely, service
This abatement reflected
as well as a drop in
In addition, the rapid increases in service
prices that reflected extraordinary
public transport,
May.
Used
adjustments
in
auto insurance,
and postal rates have recently diminished.
Federal Sector Accounts
(billions of Dollars)
I F.R.B.
e
Fiscal Year 1977 /
Fiscal Year 1 97 6 e /
Admin.
F.R.
F.R.
Admin.
Cong.
est.1/
Board
Board
est.l/
est.2/
29.6
368.0
-68.4
-8.8
751.5
397.2
-45.7
-11.1
82.4
82.4
-7.2
2.0
).1
8.8
-7.1
11.A.
-7.2
6.7
14.8
14.8
6.0
n.a.
5.1
3.1
10.8
n.a.
n.e.
Unified budget receipts
Unified budget outlays
Surplus/deficit (-), unified budget
Surplus/deficit (-),
299.6
372.2
-72.6
off-budget agencies 4/ -9.3
Means of financing combined deficits:
Net borrowing from public
Decrease
Other
in cash operating balance
5/
Cash operating balance, end of period
Memo:
Sponsored agency borrowing 6/
NIA Budget
Receipts
Outlays
Surplus/deficit (-)
High Employment surplus/deficit(-)
(NIA basis) 8/9/
362.5
413.3
-50.8
n.a.
n.a.
n.a.
CY 1976
F.R.
Board
Estimates
Calendar quarters; unadjusted data
1976
_____
1*
II
II13/
IV
75.0
99.0
-24.0
-4.1
1977
I
77.8
101.2
-23.4
-3.0
106.6
104.0
2.6
-1.0
1 .0
-1.1
-1.5
93.8
-. 5
-1.5
82.1
100.5
-18.4
-4.7
2.8
24. I
.5
1.8
9.
-6.8
-. 2
15.5
5.4
2.3
28.6
.6
-1.0
21.8
-. 1
4.7
8.8
8.u
14.8
9.4
8.8
8.9
.8
1.2
352.5
410.0
-57.5
-11.1
317.2
382.9
-65.6
-14.1
0 .3
4.8
]/. 2
-. 3
.5
10.0
93.3
.3
307.4
378.7
-71.3
306.4376.0
-69.6
364.7
404.5
-39.8
n.a.
n.a.
n.a.
355.3
418.0
-62.7
326.1
n. a.
-8.0
i1.a.
n.a.
-2.3
-6.3
391.3
-65.2
.3
Seasonally adjusted, annual
330.8
320.4
312.7
394.9
384.7
381.3
-64.1
-64.3
-68.6
-11.7
-5.0
-4.9
rates
340.6
404.3
-63.7
-3.4
* actual
e--estimated
n.e.--not estimated
n.a. --not available
p--preliminary
Treasury statement, June 24, 1976.
First Concurrent Resolution on the Budget, April 29, 1976
Effective in CY 1976, the fiscal year for the U.S. Government changes from July 1 - June 30 to ) ctober 1 - September 30.
Hence, 1976 QIII represents a transition quarter.
Includes Federal Financing Bank, Postal Service, Export-lmport Bank, Rural Electrification and Telephone revolving fund,
Housing for the Elderly or Handicapped Fund, and Pension Benefit Guaranty Corporation
Checks issued less checks paid, accrued items and other transactions
Includes Federal Home Loan Banks, Federal National Mortgage Association, Federal Land Banks,
Federal Intermediate Credit Banks, and Banks for Cooperatives
Quarterly average exceeds fiscal year total by $.7 billion for FY 1976 due to spreading of wage base effect over calendar year
Estimated by F.R.B. staff
The high employment budget estimates now fully incorporates taxes on inventory profits beginning 1973.
10.0
n.e.
n.e.
351.8
414.4
-62.5
360.5
421.4
-60.9
-4.7
-. 8
i
III-T-1
SELECTED DOMESTIC FINANCIAL DATA
(Dollar amounts in billions)
Indicator
Monetary and credit aggregates
Total reserves
Nonborrowed reserves
Money supply
Ml
M2
M3
Time and savings deposits
(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs + credit unions)
Bank credit (end of month)
Market yields and stock prices
ederal funds
wk. endg.
"
reasury bill (90 day)
"
day)
(90-119
paper
Commercial
"
New utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
FNMA auction yield
(FHA/VA)
Dividends/price ratio (Common
stocks)
NYSE index (12/31/65=50)
wk. endg.
end of day
Latest data
Level
Period
Net change from
Three
Month
ago
months ago
June
June
7.2
6.8
SAAR (per cent)
4.0
3.1
-. 4
-.1
34.34
34.22
June
June
June
303.0
700.2
1158.3
-1.2
5.2
7.4
6.7
9.8
11.0
4.1
9.0
11.4
June
June
June
June
397.2
70.6
458.2
743.2
10.1
2.4
11.1
2.1
13.7
-2.6
12.8
4.3
13.0
-1.1
15.2
4.7
7/7/76
7/7/76
7/7/76
7/9/76
7/8/76
7/12/76
7/7/76
7/12/76
Credit demands
Percentage or index points
.64
-.07
5.37
.44
5.38
-.08
.55
5.75
-.13
8.60
-.11
6.78
-.08
.13
9.05
-.09
.11
3.62
56.54
Total of above credits
e - Estimated
-.24
2.53
-.69
-.68
-. 53
-.78
-.20
-.05
-.30
8.35
-.02
2.63
Net change or gross offerings
Current month
Year to date
1976
Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)
Municipal long-term bonds (gross
offerings)
Federally sponsored Agcy. (net borrowing)
U.S. Treasury (net cash borrowing)
Year
ago
1975
1976
1975
June
May
April
June
-. 4
1.5
4.3
3.0e
-1.9
-.3
3.1
3.9
-4.3
6.9
17.4
14.9e
-6.4
-.4
11.0
21.4
June
June
July
2.9e
.4
5.6
3.1
.6
7.8
17. le
.8
38.7
15.3
-.4
43.9
91.5
84.4
17.3
16.3
III - 1
DOMESTIC FINANCIAL DEVELOPMENTS
Most market rates of interest have declined somewhat since
the June 22 FOMC meeting.
During the early part of the intermeeting
period, market sentiment was bolstered by incoming data indicating
slow growth in the monetary aggregates--particularly M1--and a
moderating pace of expansion in economic activity.
In this environ-
ment the bond markets were able to absorb a sizable volume of new
issues at stable yield levels. More recently, a downward movement
in the Federal funds rate from 5-1/2 per cent to 5-1/4 per cent,
occurring as near-term financing calendars lightened, has sparked a
rally in the money and capital markets.
Yields on short-term market instruments on balance have
fallen by about 20 to 35 basis points since the June Committee meeting,
while most bond rates have eased about 10 basis points.
In the
primary market for home mortgages, the average interest rate on new
loan commitments has edged a bit higher since mid-June.
Data for the month of June confirm the emergence of several
new developments in financial flows first noted in the last Greenbook.
In addition to maintaining a strong pace of long-term financing,
domestic business firms expanded their short-term indebtedness to
a modest extent for the second consecutive month.
With the rate
spread between bank and open market credit sources widening, businesses focused their demands for short-term funds in the commercial
paper market.
Even so, total bank credit continued to expand slowly,
III - 2
SELECTED FINANCIAL MARKET QUOTATIONS
(One day quotes--in per cent)
May '76 .June '76
FOMC
FOMC
June 29
June 22
May 18
June '75
FOMC
June 17
Apr. '76
FOMC
Apr. 20
Federal funds-1
5.31
4.78
5.28
5.48
5.58
5.37
5.275/
Treasury bills
3-month
6-month
1-year
5.03
5.36
4.73
5.08
5.42
5.28
5.73
6.03
5.38
5.75
6.08
5.37
5.76
6.08
5.39
5.15
5.69
5.45
5.98
5.72
Commercial paper
1-month
3-month
5.25
4.75
5.00
5.25
5.50
5.63
5.88
5.38
5.63
5.50
5.75
5.25
5.50
5.05
5.45
5.63
6.15
5.88
6.15
5.70
6.15
5.75
6.15
5.50
5.88
Federal agencies
1-year
6.20
5.84
6.65
6.57
6.58
n.a.
n.a.
Bank prime rate
7.00
6.75
6.75
7.25
7.25
7.25
7.25
8.95
9.22
8.42
8.44
8.82
8.69
8.78
8.70
8.70
8.74
8.72
8.73
8.6 0p
8.61p
6.80
6.54
6.83
6.85
6.87
6.87
6.78
7.96
7.82
8.13
7.99
8.06
7.98
7.95p
828.61
48.22
1003.46
54.76
989.45
53.92
997.63
55.14
1000.65
55.46
991.81
55.32
1006.06
56.43
89.10
525
103.07
589
104.43
591
104.70
626
105.09
621
105.26
622
106.94
618
July 6
July 13
Short-term
5.61
5.50
2/
Large neg. CD's3-months
6-months
5,50
5.80
Long-term
Corporate,
New AAA3
Recently offeredMunicipal
4/
(Bond Buyer)U.S. Treasury
(20-year constant
maturity)
Stock prices
Dow-Jones
N.Y.S.E.
AMEX
Keefe Bank Stock
1/
2/
3/
4/
5/
Weekly average.
Highest quoted new issues.
One day quotes for preceding Friday.
One day quotes for preceding Thursday.
Average for first 6 days of statement week ending July 14.
n.a.--not available.
p--preliminary.
III - 3
and banks increased their CD and reservable nondeposit
liabilities--
thereby more than offsetting declines in savings accounts and private
demand deposits.
in
June,
Deposit growth at thrift institutions also slackened
but perhaps not as sharply as did inflows to similar accounts
at commercial banks.
Monetary Aggregates and Bank Credit
M1 expanded at an annual rate of nearly 8-1/2 per cent in
the second quarter.
However, since rising strongly in April, it has
fluctuated along an essentially sideways course, and the average
daily level in
it
is
June was actually slightly below that in
May.
Although
impossible to account conclusively for the sluggish behavior of
M1 in May and June, a number of possible explanatory factors can be
noted.
It seems likely,
for example,
that there has been a gradual
readjustment of cash balances to desired levels following the earlier
empirical money demand relations suggest
upsurge in M1/.
Moreover,
that the rise in
interest rates since mid-April may have damped
monetary expansion to a minor extent.
During June, M1 may also have
been depressed temporarily by deposit drains associated with what
appears to have been unusually heavy corporate reliance on asset
liquidations to finance tax payments and by a smaller than usual
bulge in Federal outlays at the end of the fiscal year.
U.S.
1/
Government deposits rose $2.4 billion,
(Average
seasonally adjusted,
in
Data on demand deposit ownership at large banks suggest that
consumer-held demand balances--which had risen rapidly in March
and April--declined sharply in May, while business accounts rose.
III
the month.)
- 4
Finally, demand deposits at commercial banks likely were
affected slightly by transfers of funds to newly-authorized checking
accounts at New York mutual savings banks; net inflows to these new
2/
accounts totaled $44 million during June.2
Whatever its cause, the flatness in M1 was the major factor
behind the slowing of M2 and M 3 growth to rates of 5.2 and 7.4 per
cent, respectively, in June.
However, diminished inflows of interest-
bearing deposits also contributed to the reduction in the growth of
these broader aggregates.
At commercial banks, savings deposits are
3/
estimated to have contracted slightly on a seasonally adjusted basis.1/
This weakness evidently represents a reversal of the inflows of
interest-sensitive funds that occurred earlier in 1976; several
bankers contacted in a telephone survey reported that depositors
have shifted funds to market securities and to CD's, including large
nonnegotiable certificates that are a part of the time deposit
component of M2 .
Indeed, the time deposit component of M2 (excluding
savings) increased in June at the most rapid rate in two years,
apparently reflecting the strength in large time deposits.
2/
Total demand deposits at these institutions were $101 million
at the end of June, but $57 million represented transfers from
pre-existing "POW" accounts.
3/
Data from weekly reporting banks indicate that, on an unadjusted
basis, savings deposits of domestic governmental units registered
the largest decline over the month; deposits of individuals and
nonprofit institutions also posted a noticeable decline, while
business savings fell only slightly.
III -
5
MONETARY AGGREGATES1 /
(Seasonally adjusted changes)
1975
HII
Twelve
months
ending
1976
HI
QI
QII
May
Junep
June 1976
Per cent at annual rates
M1 (currency plus demand
deposits)
4.7
5.5
M 2 (M1 plus time deposits
at commercial banks
other than large CDs)
8.3
10.8
10.1 11.2
11.5
12.0
11.4 12.2
Adjusted bank credit proxy
3.7
2.4
2.3
2.4
-4.6
16.3
Total time and savings deposits at commercial banks
7.3
7.1
7.8
6.2
1.0
15.1
11.4
15.1
15.9 13.7
11.4
10.1
13.0
17.0
7.4
25.8
6.9
28.3 21.7
6.7 7.0
18.3
5.6
-0.7
19.0
20.7
7.4
18.2
11.9
18.6
15.4 15.0
9.7
9.1
14.5e 16.8
14.5
10.3
6.9e
12.2
9.2
6.9e
16.9
10.6
15.8e
M3 (M2 plus deposits at
thrift institutions)
a.
Other than large negotiable CD's
Savings deposits
Time deposits
2.6
8.4
6.4
-1.2
5.2
10.6
7.4
11.4
Deposits at nonbank thrift
a.
b.
c.
Savings and loan
associations
Mutal savings banks
Credit unions
15.3
10.1
11.7e
Billions of dollars
(Based on seasonally adjusted monthly data, not annualized)
Memoranda:
a.
b.
c.
1/
2/
Total U.S. Government
deposits
Negotiable CD's
Nondeposit sources
of funds
0.3
-0.2
0.2
0.4
-2.1
--
1.1 -0.4
-3.2 -0.9
-0.1
0.1
0.2
-3.2
2.4
2.4
0.3
-1.1
0.1
Half-year and quarterly growth rates are based on quarterly average data.
Twelve months ending April 1976.
III - 6
Making rough allowance for the inflows of large time
deposits at commercial banks,
inflows of savings and consumer-type
time deposits taken together probably weakened somewhat more at
commercial banks than at thrift institutions.
on a month-end basis,
Nevertheless, measured
deposit growth at savings and loan associations
and mutual savings banks fell to a 9-1/2 per cent annual rate in
from 13-1/2 per cent in May.
June
This is a more pronounced deceleration
than would seem explicable by the movement of market rates of interest
relative
to deposit rate ceilings.
An additional influence may have
institutions in
been efforts of thrift
of high cost time deposits--possibly in
levels.
Press reports
indicate that,
some areas to moderate inflows
response to high liquidity
(confirmed by staff contacts in
over the past several months,
cut offering rates,
the industry)
a number of institutions
increased minimum denominations,
lengthened
minimum maturities, and curtailed advertising--particularly for
longer-term accounts.
The volume of large negotiable CD's outstanding increased
$4 billion between mid-May and the end of June,
adjusted basis.
on a seasonally
Quarter-end window dressing appears to have con-
tributed importantly to this reversal of the earlier downtrend,
but
responses to the May Survey of Bank Lending Practices provide support
for the view that some of the rise reflected positioning for an expected
strengthening of business loan demand.4/ The Euro-dollar liabilities
4/
A summary of the results of this survey will appear in
to the Greenbook Supplement.
an appendix
III - 7
of member banks also increased in June, and the credit proxy rose
markedly.
Available information suggests that the rise in Euro-
dollar borrowings was more the result of a coincidence of special
factors than of a fundamental shift in liability management.
Total loans and investments of commercial banks increased
at a 2 per cent annual rate in
June,
somewhat less than in
the pre-
5/
ceding two months.5/ Once again, purchases of Treasury securities
accounted for nearly all of the gain;
marginally.
total loans increased only
Loans to nonbank financial institutions fell $900
million and those to commercial and industrial firms dropped $400
million; in addition, real estate loan growth slowed.
Business Finance
Business short-term credit outstanding rose at a 2-1/2 per
cent annual rate in June, as a large increase in commercial paper
issued by nonfinancial firms more than offset the decline in business
loans at banks.
For the April-June period as a whole, business
short-term borrowing registered a modest net increase--the first
quarterly advance since late 1974.
At large banks, borrowing by
trade and nondurable manufacturing firms was fairly strong in June,
perhaps reflecting inventory accumulation in these sectors.
5/
The large discrepancy between the growth rates of bank credit
(2.1 per cent SAAR) and the credit proxy (16.3 per cent SAAR)
apparently is attributable in part to the difference between
single day and daily average calculations--the increase in the
proxy from the last week of May to the last week of June was
$5.6 billion, as compared to the $7.0 billion change in the
monthly averages. A decline in Federal funds purchases (a liability
not included in the proxy) and a rise in certain cash assets
(not included in bank credit) appear also to have contributed
significantly to the divergence of the two aggregates.
III -
8
COMMERCIAL BANK CREDIT
(Seasonally adjusted changesat annual percentage rates)1/
Total loans and investments2 /
U.S. Treasury securities
1976
April
May
June
4.3
5.4
5.4
2.1
22.1 36.8 44.3 26.3
24.5
40.0
12.9
1975
H2
HI
Ql
Q2
4.5
4.9
5.5
Other securities
2.9 -1.0 -4.1
2.2
5.9
Total loans2 /
2.3
1.0
1.9
Business loans 2 /
Real estate loans
Consumer loans*
MEMO:
2/
3/
2.1
-1.7 -4.9 -7.4 -2.2
4.3 8.0 8.9 6.9
5.0 n.a. 3.7 n.a.
-6.2
6.9
11.0
.7
.8
.5
2.1 -2.8
8.6
5.1
n.a. n.a.
Business loans plus
nonfinancial commercial
paper3/
1/
1.6
--
-3.5 -1.7
-5.3
1.9
--
3.2
2.6
Last Wednesday-of-month series except for June and December, which are adjusted to
the last business day of the month.
Includes outstanding amounts of loans reported as sold outright by banks to their
own foreign branches, nonconsolidated nonbank affiliates of the bank holding
companies (if not a bank), and nonconsolidated nonbank subsidiaries of holding
companies.
Nonfinancial commercial paper is measured from end-of-month to end-of-month.
p - Preliminary.
n.a. - Not available.
*
Data for consumer loans have not yet been revised to conform with latest revision
in consumer credit statistcs.
III -
9
The further increase in business short-term borrowing
occurred contemporaneously with a very large amount of capital market
financing.
Domestic firms sold $3 billion of new bonds in the public
market during June,
more than half of this total being accounted
for by offerings rated A or lower.
the year,
During the earlier months of
such lower-rated issues accounted for about 40 per cent
of total public offerings, but the staff expects that they will
preponderate over the remainder of 1976.
The projected July and
August borrowing volumes are well below the pace of the first half;
some of this drop-off is
seasonal,
but conversations with under-
writers suggest that many firms--particularly the larger, higherrated ones--concentrated their long-term financing for this year
in the first half in the expectation that bond rates would move
upward later.
Equity financing activity, in contrast, is projected to
slow only slightly in
first half.
July and August from the average pace of the
Although utilities have accounted for about 60 per cent
of the volume of common and preferred stock sold thus far this year,
equity flotations by manufacturing firms have proceeded at a record
rate.
The major stock price indexes recently have been near or
above their previous 1976 highs.
Other Securities Markets
As in the corporate market, some decline in the volume of
new municipal bond financing from recent high levels appears in
prospect for the third quarter.
The Board staff projects July and
III -
10
SECURITY OFFERINGS
(Monthly totals or monthly averages, in millions
of dollars)
1975
Year
QIV
QIe;
QIIe/
1976
June e/
Julyf/
Aug.f/
Gross offerings
Corporate securities--Total
4,471
4,362
4,523
4,666
5,500
3,700
3,100
Publicly offered bonds
By quality-Aaa and Aa
Less than Aa
By type of borrower
Utility
Industrial
Other
2,717
1,939
2,444
2,533
3,000
1,600
1,400
1,422
1,295
776
1,163
1,480
964
1,160
1,373
1,180
1,820
925
1,432
360
783
630
780
1,210
376
604
Privately placed bonds
847
1,379
Stocks
By type of issuer
Manufacturing
Utility and transp.
Other
907
1,044
123
598
186
158
664
221
1,181
Foreign securities
State and local government
securities
Long-term
Short-term
2,544
2,420
2,252
2,216
2,781
1,671
1,065
950
985
933
1,000
1,200
1,500
357
643
200
170
1,130
200
614
1,065
2,902
2,293
2,900
2,000
2,200
1,600
2,000
1,300
4,259
929
5,500
199
5,000
-298
800
1,200
Net offerings
U.S. Treasury
Sponsored Federal agencies
e/
f/
T/
2/
3/
7,564
187
8,048
390
7,897
414
2,540
-80
Estimated.
Forecast.
Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes only publicly offered issues of marketable securities.
III -
11
August offerings averaging a shade over $2 billion--well below the
$2.8 billion monthly average of the first
half.
There normally is
a
summer lull in primary market activity, but it may be somewhat
accentuated
this year because the funding of short-term debt that
apparently helped to boost bond issuance in the first half should
now be abating.
New York City paid down the balance of its debt to the
Treasury by the end of the fiscal year and received a new loan of
$500 million on July 1.
This loan and future Federal credits are
conditioned on further austerity measures by the City and satisfactory
wage agreements with municipal unions.
The offer of the Municipal
Assistance Corporation to exchange its debt obligations for outstanding City notes--extended
to July 21 following Moody's down-
grading of certain MAC issues--has elicited little response from
investors.
Since the last FOMC meeting,
the Treasury has sold $2.5
billion of 5-year, 1-month notes and redeemed $800 million of maturing
3- and 6-month bills.
Budget projections for the current transition
quarter are subject to greater than usual uncertainty, but net
sales of marketable Treasury obligations are likely to amount to
somewhere between $12 and $16 billion--the precise sum depending in
part on the extent to which the Treasury is
willing to run down
the nearly $15 billion cash balance it held on June 30, given the
projected large deficit in
the fourth quarter.
The Board staff
III - 12
estimates that the Treasury will need to raise $5-1/2 billion in
the market prior to the mid-August refunding.
The Treasury is
likely to continue emphasizing maturity lengthening in its debt
management, and thus it probably will meet most of its cash needs
through coupon issues.
Mortgage Market and Consumer Credit
Conditions in
the residential mortgage market have been
relatively stable since mid-June.
Secondary market yields generally
edged down, while the average rate on new loan commitments at S&L's
rose slightly further.
Loan demand apparently continues to be strong
in many areas, and despite the recent slowing of deposit growth,
S&L's seem generally to remain willing lenders.
may feel because of the deterioration in
Any discomfort they
their over-all cash flows
likely is eased by the fact that their liquid assets ($34 billion
at the end of May) are high relative to their loan commitments
($22 billion), and their indebtedness to Home Loan Banks is much
reduced from the peak levels of late 1974.
The mortgage portfolios
of S&L's rose $3.2 billion in May, seasonally adjusted--somewhat
less than in
the preceding two months,
but still
a substantial figure.
Extensions of consumer instalment credit declined moderately
for the second consecutive month in May, probably reflecting the
weakness in auto sales.
However,
repayments
fell even more,
and thus
the volume of credit outstanding expanded at an annual rate of nearly
11 per cent--up slightly from the pace in
April.
All major categories,
save mobile home credit, contributed to the expansion.
III - 13
INTEREST RATES AND SUPPLY OF FUNDS FOR
CONVENTIONAL HOME MORTGAGES
AT SELECTED S&Ls
Average rate on
new commitments
for 80% loans
(Per cent)
End of period
Basis point
change from
previous
week
Per cent of S&L's
with funds in
short supply
1975--High
Low
9.59
8.80
---
66
7
1976--High
Low
9.10
8.70
---
10
0
June
8.78
8.83
8.88
8.90
8.93
8.93
0
+5
+5
+2
+3
0
4
11
18
25
July 2
9
1
3
5
6
n.a.
n.a.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA AUCTIONS OF FORWARD PURCHASE COMMITMENTS
Conventional
Amount
($ millions)
Govt.-underwritten
Yield
to
FNMA1/
Amount
($ millions)
Yields on GNMA
guaranteed'mortgage
Yield
to
FNMA1/
backed securities
for immediate
delivery 2/
Offered
Accepted
1975--High
Low
100
11
51
9
10.02
8.96
643
25
366
18
9.95
8.78
9.10
7.99
1976--High
Low
13]
33
91
22
9.31
9.00
634
58
321
32
9.20
8.83
8.44
8.00
77
70
9.30
147
99
9.14
94
59
9.31
261
158
9.12
91
82
9.27
148
88
9.05
Offeredl Accepted
June
7
14
21
28
July 6
12
1/
8.39
8.34
8.34
8.34
8.41
8.34
Average gross yields before deducting fee of 38 basis points for mortgage servicing.
Data reflect the average accepted bid yield for home mortgages, assuming a prepayment
period of 12 years for 30-year loans, without special adjustment for FNMA commitment
fees and FNMA stock purchase and holding requirements on 4-month commitments. Mortgage
amounts offered by bidders relate to total bids received.
2/ Average net yields to investors assuming prepayment in 12 years on pools of 30-year
SFHA/VA mortgages carrying the prevailing ceiling rate on such loans.
III -
14
Although more than one month's data will be needed to
assess fully the impact of the recent FTC ruling regarding the
holder in due course doctrine, the May figures on consumer instalment credit suggest no more than marginal effects from the FTC
edict.
The small decline in mobile home loans and some weakness
in home improvement loans are the only perceptible signs of shifting
lending patterns that might tentatively be attributed to the regulatory action.
III -
CONSUMER
Total
Change in outstandings
$ Billions
Per cent
Bank share (%)
Extensions
$ Billions
Bank share (%)
Liquidations ($ billions)
Automobile Credit
Change in outstandings
$ Billions
Per cent
Extensions
$ Billions
New-car loans over 36 mos.
as % of total new-car loans
Commercial banks 1/
Finance companies
New-car finance rate (APR)
Commercial banks
(36 mo. loans)
Finance companies
15
INSTALMENT CREDIT
1974
1975
1975
QIV*
QI*
1976
Apr.*
May*
9.0
6.1
44.4
6.9
4.4
41.7
16.0
10.2
49.2
16.3
10.0
37.6
16.6
10.3
38.3
17.7
10.9
48.4
160.2
45.4
151.1
160.0
47.1
156.4
177.4
48.3
161.4
190.1
48.9
173.8
186.1
48.3
169.5
180.5
48.0
162.8
0.3
0.6
2.6
5.2
7.4
14.3
8.2
15.5
8.2
15.3
14.3
43.2
47.8
53.4
62.1
61.1
53.7
8.8
14.0
17.0
20.0
8.6
23.5
25.4
29.5
32.3
11.36
13.11
11.24
13.17
11.17
13.15
11.08
13.13
10.97
12.61
1/ Series was begun in May 1974, with data reported for the mid-month of each quarter.
Figure for 1974 is average of May, August, and November.
* Quarterly and monthly dollar figures and related percentage changes are SAAR.
11.01
IV - T -
1
July 14, 1976
U.S. International Transactions
(In millions of dollars, seasonally adjusted1/)
1976
1975
YEAR
Q4
Q1
Mar.
Apr.
May
Merchandise exports
Merchandise imports
Trade balance
107,133
98,150
8.983
27,655
25,456
2.199
26,939
28.447
-1.508
9,252
9,891
-639
9,313
9,736
-423
9,479
9,400
79
Bank-reported private capital flows
Claims on foreigners (increase -)
Long-term
Short-term
(of which on commercial banks in
offshore center2/)
-12,585
-13,238
-2,351
-10,887
-4.585
-5,287
-943
-4,344
-2.833
-3,714
-245
-3,469
-2.100
70
-289
359
3,429
-2,452
-180
-2,272
-87
-983
-258
-725
(-2,076)
(-3,735)
(-6,920)
Liabilities to foreigners (increase +)
Long-term
Short-term
to commercial banks abroad
(of which to commercial banks in
offshore centers2/)
to other private foreigners
and regional organizations
to int'l
Foreign private net purchases (+) of U.S. Treasury securities
Other private securities transactions (net)
Foreign net purchases (+) of U.S. corp. securities
(of which stocks)
U.S. net purchases (-) of foreign securities
(new foreign issues of bonds and notes)
-2,170
178
-2,348
-2,612
5,881
15
5,866
4,797
(1,795)
1,549
64
2,649
(706)
758
845
162
(-229)
146
-465
451
(-2,609)
75
189
19
(3,888)
563
506
245
(68)
-213
-143
146
-3.479
2,727
(3,205)
-6,206
(-7,168)
-1.144
1,217
(944)
-2,361
(-2,573)
-1.481
1,026
(942)
-2,507
(-2,824)
-589
386
(425)
-975
(-1,039)
-242
135
(155)
-377
(-475)
-443
38
(47)
-481
(-560)
4.604
5,677
(1,469)
-1,073
2.088
1,780
(519)
308
1.856
1,249
(531)
607
488
807
(157)
-319
1.353
1,441
(256)
-88
1.135
1,068
(68)
67
89
-773
-330
-521
-557
435
2,963
-1,223
18,219
-12,212
2,163
-1,727
-2,257
1.191
956
-160
4,709
-3,039
455
-433
-576
4,288
1,460
-79
5,419
-3,290
441
-480
-551
3.151
-3.841
-273
-7,128
-2,027
-6,307
2,437
-1,231
-1,908
-523
-1,694
1,229
-920
-1,746
763
-1,580
-689
-240
2,143
4,574
3,155
-2,177
-48
-48
-1,083
4,602
Statistical discrepancy
Official settlements balance
43.
0/S bal. excluding OPEC
896
-2
898
1,254
-607
Other capital account items
U.S. Govt. capital, net claims3/ (increase -)
U.S. direct investment abroad (increase -)
Foreign direct investment in U.S. (increase +)
Nonbank-reported capital, net claims (increase -)
42.
(327)
881
166
715
1,034
Change in U.S. reserve assets (increase -)
MENO:
Current account balance
41.
(-1,577)
702
91
611
-992
Change in foreign official assets in the U.S.
OPEC countries (increase +)
(of which U.S. corporate stocks)
Other countries (increase +)
Other transactions and statistical discrepancy (net payments (-))
Other current account items
Military transactions, nedt3/
Receipt of income on U.S. assets abroad
Payment of income on foreign assets in U.S.
Other services, net
Remittances and pensions
U.S. Govt. grants3/
(409)
653
-355
1,008
-605
1
1
11,945
-3,997
1,680
-397
NOTES:
1/ Only trade and services, U.S. Govt. grants and U.S. Govt. capital are seasonally adjusted.
2/ Offshore centers are United Kingdom, Bahamas, Panama and Other Latin America (mainly
Cayman Islands and Bermuda)
3/ Excludes certain special transactions with Israel which are recorded in Department of
Coemerce statistics as offsetting shifts between U.S. Govt. capital and both military
transactions and U.S. Govt. grants.
166
I
1
I
1-
t
-158
-832
-578
649
609
490
INTERNATIONAL DEVELOPMENTS
Foreign exchange markets.
In the four weeks since the last
green book selling pressure on the pound and guilder has eased and that
on the Italian lira has been reversed.
In addition new downward pressure
on the French franc and upward pressure on the yen has emerged.
During
this period the trade-weighted value of the dollar has declined only a
slight 1/4 per cent.
The dollar remains at roughly the same level it
reached some 3 months ago, after appreciating about 15 per cent over the
previous 12 months.
The pound has been under more or less continuous downward pressure
since early March.
However, in the last two weeks this pressure has greatly
eased;
, and the pound
has appreciated almost 1 per cent.
The pound's recent stability
seems to be due to expectations that (a) the U.K. government will announce
cuts in public expenditures and (b) the Bank of England will intervene
heavily to prevent the pound from falling below the $1.77-$1.78 level.
Downward pressure on the guilder has also eased recently.
the
guilder has been replaced by the Belgian franc at the bottom of the snake.
IV-
2
Since the conclusion of Italian elections on June 21,
the lira
has appreciated 1.8 per cent against the dollar,
. Besides the reduced uncertainty associated
with the conclusion of the elections, the lira was also boosted by the
discussion of further financial aid for Italy at the Puerto Rican Summit.
The Japanese yen has also strengthened recently,
rising 2-1/2
per cent over the last four weeks
. The main factors behind the yen's strength were reports that
the Japanese Ministry of International Trade and Investment and U.S.
Treasury
officials were urging Japanese monetary authorities to allow the yen to
appreciate.
The French franc has come under selling pressure during the last
week-and-a-half --
declining 3/4 per cent against the dollar
. The weakness of the French franc is
due to forecasts of increased inflation,
probably
and to a growing awareness of
the impact that the current European drought will have on the French trade
balance (reduced net grain exports and increased oil imports due to a
decrease in the production of hydro-electric power).
.
The Syatem purchased $26 million equivalent of Belgian francs,
on July 9,
made a $25 million equivalent repayment on the Belgian franc
swap debt leaving an outstanding debt of $102 million.
purchased $8 million equivalent of marks to hold in
The System also
balances.
and,
IV - 3
Euro-dollar interest rates have fallen about 5/8 of a percentage
point in both the 6 and 12 month maturities during the last month, and
by lesser amounts in the shorter maturities.
The gold price has drifted downward about $3.00 over the last
four weeks to a 2-1/2 year low of about $122 per ounce.
The second IMF
gold auction was held on July 14 but the results are not available at
this writing.
At the June 2 auction the Bank of France purchased 33,000
ounces of gold and the Swiss National Bank bought 32,000 ounces (worth
about $4 million at market prices).
U.S. banks' foreign branch activity.
Assets of foreign branches
of U.S. banks, exclusive of interbranch claims within the same parent bank,
rose at a 17 per cent annual rate ($8 billion) in the first four months
of 1976 compared with a 15 per cent annual rate in the last half of 1975
and a 5 per cent annual rate ($2.1 billion) in the same period last year.
Branch loans to foreign nonbanks rose at an 11 per cent annual
rate in the first four months of the year, about the same as in the second
half of last year, although there is other evidence that overall loan
demand in several major industrial countries has strengthened recently.
Loans to nonbanks continued to be bolstered in about the same measure as
the second half of last year by branch participation in syndicated Eurodollar loans to borrowers in industrial countries as well as to developing
countries, which have continued this year to have heavy recourse to the
Euro-dollar market to cover payments deficits.
Branch placements with
other banks, the largest asset category, rose only one-half as fast as
IV -4
Assets and Liabilities of Foreign Branches of U.S. Banks
(billions of dollars; excluding accounts with other branches of parent bank)
Assets:
total
Claims on U.S. residents:
Parent bank
Other
Claims on foreigners:
Other banks
Official institutions
Nonbanks
Other assets
Liabilities:
total
To U.S. residents:
Parent bank
Other
To foreigners:
Other banks
Official institutions
Nonbanks
Other liabilities
total branch assets.
1974
Dec.
Apr.
124.3
125.4
6.9
4.5
2.4
1975
June
Dec.
1976
Apr.
131.5
141.4
149.5
5.8
3.1
2.8
5.5
2.3
3.2
6.7
3.7
3.1
9.1
6.1
3.0
111.2
60.3
4.1
46.8
114.8
60.3
4.4
50.1
119.6
63.7
4.8
51.1
128.4
68.4
5.9
54.1
133.8
70.5
7.2
56.1
6.3
5.8
6.3
6.3
6.5
125.0
126.4
131.9
142.0
150..
12.0
5.8
6.2
14.9
8.7
6.2
18.6
12.2
6.4
20.1
12.1
8.1
26.7
14.5
12.2
106.1
65.7
20.2
20.2
105.4
62.3
23.2
19.9
106.8
65.0
21.1
20.7
115.6
72.2
22.8
20.6
117.5
72.1
21.8
23.6
6.9
6.1
6.5
6.4
5.8
However, loans to foreign official institutions,
which arise mostly from branch participations in syndicated Euro-dollar
loans to central governments or monetary authorities, underwent a sharp
increase.
unchanged.
Claims on U.S. residents other than the parent bank were virtually
However, claims on the parent bank, which showed little change
between end-December and end-March, rose sharply at the end of April, when
the last working day was a Friday, in reflection of week-end Euro-dollar
operations.
IV - 5
The funding of the $8.0 billion rise in branch assets came largely
from the United States.
Advances from head offices increased $2.4 billion,
after being essentially unchanged in the second half of 1975.
Liabilities
to U.S. residents other than parent banks rose $4.1 billion, substantially
more rapidly than in most of last year; however, much of the increase
occurred in April when the end-month figures reflected week-end placements
of Euro-dollars by U.S. agencies and branches of foreign banks.
While
liabilities to foreign official institutions were down, foreign private
nonbanks increased their deposits with the branches by $3.1 billion.
The quarterly data on the distribution of branch accounts by
country of customer show that in the first quarter of this year claims
on non-oil developing countries rose 11 per cent ($2.5 billion) to $24.0
billion, compared with a 3 per cent ($4.0 billion) rise in claims on other
countries.
In particular, claims on Brazil rose 25 per cent, to $6.9 billion.
Other especially large increases in claims in the first quarter occurred
with respect to West Germany (19 per cent, to $8.9 billion), the Soviet
Union (62 per cent, to $1.0 billion), and Middle East oil-exporting countries
(16 per cent, to $2.5 billion).
For the three quarter-ends for which data
are available, the geographical distribution of assets of the reporting
branches was as follows after eliminatinn of claims on other branches of
the same parent bank (in billions of dollars):
IV - 6
9/30/75
Industrial countries1/
Offshore banking
centers2/
Developing countries:
Non-oil
Oil-exporting
Other and unallocated
Total
12/31/75
3/31/76
90.8
95.5
98.7
17.2
17.3
18.0
19.8
4.2
2.4
21.5
5.4
3.1
24.0
6.0
2.6
134.4
142.8
149.3
1/ Europe, Canada, Japan, South Africa, Australia, New Zealand,
and United States.
2/ Bahamas, Bermuda, Cayman Islands, Netherlands Antilles,
Panama, Hong Kong, and Singapore.
IV
-
7
U.S. International Transactions.
The U.S.
merchandise trade
balance was a small surplus in May-the first surplus in five months.
For April and May combined the merchandise trade deficit was $2.1 billion
(seasonally adjusted annual rate, balance of payments basis),
the $6 billion first quarter deficit rate.
down from
The smaller than expected April-
May deficit was largely due to the strong performance of agricultural and
non-agricultural exports.
U.S. Merchandise Trade. Balance-of-Payments Basis
(billions of dollars, seasonally adjusted annual rates)
19 75 r
1 9 7 5
1 9 7 6
April
& May April
Year
1Q
2Q
3Q
EXPORTS
Agric.
Nonagric.
107.1
22.3
84.9
108.1
24.3
83.8
103.4
19.6
83.8
106.4
22.3
84.2
110.6
23.0
87.7
107.8
21.3
86.4
112.8
23.2
89.6
111.8
22.6
89.1
113.7
23.7
90.0
IMPORTS
Fuels
Nonfuels
98.2
28.5
69.6
102.3
27.8
74.5
90.4
26.7
63.7
98.0
30.0
68.0
101.8
29.5
72.3
113.8
31.9
81.9
114.8
34.4
80.4
116.8
38.8
78.0
112.8
30.0
82.8
TOTAL BALANCE
+9.0
+5.7
+13.0
+8.4
+8.8
-6.0
-2.1
-5.1
1Qr
May
+0.9
Trade Volume
(1975 = 100)
EXPORTS
Agric.
Nonagric.
100
100
100
100
100
100
96.5
87.8
98.9
100
103
99.1
103
108
102
99.6
102
98.7
103
112
101
103
110
101
103
115
101
IMPORTS
Fuels
Nonfuels
100
100
100
103
96.9
106
90.1
93.8
88.9
101
108
99.4
105
102
106
116
105
120
115
112
115
117
129
112
113
94.4
118
I__________________
NOTE:
I,
I____________
Details may not add to totals because of rounding.
IV
- 8
Exports in April-May were $113 billion at an annual rate, 5
per cent above the first quarter rate but only 2 per cent greater than the
fourth quarter of 1975.
The volume of exports in April-May recovered to
the fourth quarter 1975 level.
Agricultural export volume continued to be very strong in May
as corn and soybeans exports again rose due to increased exports to Western
Volume will remain high as drought conditions
Europe and the Soviet Union.
persist in Western Europe and further Russian purchases of grain are
expected under the U.S.-U.S.S.R.
grain agreement.
In addition,
the Soviet
Union has recently purchased nearly 2.5 million metric tons of soybeans,
not covered by the agreement,
from U.S.
are expected to come from the 1976 U.S.
firms.
Most of these soybeans
Corn and wheat prices rose
crop.
about 10 per cent and soybean prices 40 per cent between May 1 and July 1,
and export prices will reflect these increases.
Nonagricultural exports were at an annual rate of $90 billion
in April and May combined.
Volume rose to a level near that of the fourth
quarter of 1975 and 2.5 per cent higher than in the first quarter of 1976.
Virtually all major export categories registered increases in April-May over
the first quarter of 1976.
Exports of capital goods and nonagricultural
industrial supplies were especially strong,
a trend which may continue as
Western Europe and Japan extend their recovery from the recession. However,
new export orders declined in May and exports to non-OPEC LDC's remained
somewhat below 1975 levels.
IV
- 9
The average April-May value of imports was $115 billion at
an annual rate, one per cent above the rate in the first quarter of 1976.
While the level of fuel imports fluctuated widely from April to May,
the
combined April-May value, $34.4 billion at an annual rate was up by 7.8
per cent from the first quarter, in line with the rate of economic
expansion in the United States and the decline in domestic production.
The April-May volume of fuel imports averaged 7.2 million barrels per day
(vs. 6.9 million barrels per day in the first quarter of 1976).
Nonfuel imports in April-May averaged $80.4 billion at an
annual rate, slightly lower than the rate in the first quarter of 1976.
Imports in a number of categories had picked up much more sharply than U.S.
production and consumption earlier, and a pause was anticipated as this
apparent swing in inventory adjustment ran its course.
With continuing
domestic expansion, nonfuel imports should soon resume an upward trend.
Bank reported claims on foreigners increased by about $1 billion
in May, bringing the total increase in January-May to $7.2 billion.
of the May increase was in claims on Latin America.
Much
Liabilities to private
foreigners reported by banks increased about $900 billion in May; for the
January-May period the increase in such liabilities was about $7.7 billion
--
slightly more than the increase in claims for those months.
So far
this year the pace of lending to foreigners by U.S.-based banks has been
a little higher than last year's rate, but there has been a much larger
increase in liabilities to foreigners in January-May this year than in 1975.
IV
-
10
Data on private securities transactions other than U.S.
obligations showed net U.S.
purchases of foreign securities exceeding
foreign net purchases of U.S.
securities by $400 million in May,
same rate of outflow as in January-April.
bonds in
Treasury
the U.S. market expanded,
The list
about the
of issuers of foreign
with Brazil and Japan added to the
usual Canadian and European borrowers.
Interest rate increases in May
caused the postponement of at least one large new foreign bond issue in
in the United States.
Relatively few new foreign bonds were issued in
June,
but several large issues are scheduled
for July,
including a $750
million issue by the World Bank and $600 million by Canadian utilities.
Foreign official assets in
billion in May,
after increasing by $1.4 billion in April.
notably Saudi Arabia and Iran,
both months.
the United States increased by $1.1
accounted for virtually all the increase in
The April-May total was already double the amount these
countries acquired in the first quarter of 1976.
were increased oil revenues,
and U.S.
OPEC countries,
Factors behind this surge
lessened attractiveness of sterling assets,
interest rates that were higher than earlier in
OPEC foreign official holdings in
the year.
Non-
the United States were almost unchanged,
although there were substantial changes reported for individual countries.
United States reserve assets increased by $273 million,
owing to an increase in
drew dollars.
the U.S.
reserve position with the I.M.F.
largely
as others
IV -
World Commodity Prices.
World commodity prices have recovered
rapidly from low levels of late 1975.
index of commodity prices,
OECD imports,
in
By June 22,
the fourth quarter of 1975.
is
the Economist dollar
which weights commodities by their value in
had risen by 28 per cent over its
column in Table 1,
in
11
The overall index,
now 6 per cent above its
the second quarter of 1974.
cyclical quarterly low
The food,
component of the composite index is
shown in
the first
cyclical quarterly peak
feed and beverage price
higher now than in
the first
half of 1974, while the industrial raw materials component is
still
far below the levels reached then.
The general price level in the United States, as measured
by the GNP deflator,
has risen by 17 per cent during the period in
which these commodity prices fell and then recovered.
price
of commodities,
The relative
constructed by dividing the Economist dollar
price index by the GNP deflator, has increased by 24 per cent from
its cyclical quarterly low in
the fourth quarter of 1975 and stands
at 90 per cent of the quarterly peak reached in
of 1974.
the second quarter
For most commodities, the recent price increases can be
traced to higher rates of consumption associated with increases in
real income or significant decreases in
speculative demand such as occurred in
supply rather than to
the 1973-1974 price runup.
The Economist food price index, which might better be
called a food,
feed and beverage price index, has a weight of 61 per
IV -
12
Table 1
The Economist Commodity Price Index
1970=100
All Items
Food
Industrial Raw 1-iaterial
Total
Fibers
Ietals
United States
GNP deflator
1970 = 100
112.7
1
160.3
163.0
150.6
259.4
100.3
- 2
191.0
200.0
170.0
272.1
122.0
144.7
- 3
213.3
232.9
200.1
300.5
150.4
116.3
-
4
21S.1
222.6
212.3
29C0.
169.3
119.3
1
240.1
253.3
223.9
296.9
184.7
122.2
- 2
249.3 H
264.7
230.011
264.0
216.7d
125.1
- 3
235.5
200.5
179.3
237.9
150.3
123.0
14.
240.9
311.7 H 152.3
199.2
125.0
133.0
1
217.1
265.7
14C.4
197.3
121.5
135.4
2
207.3
24 3
.3 L 150.2
209.3
117.6
136.3
- 3
210.4
250.1
147.3
202.0
113.1
139.2
- 4
205.4 L
243.7
144.66 L
207.1
107.2
213.7
257.u
1-3.41
22C.6
112.
142.
245.0 P
206.5 P 177.4
136.3
144.7 e
140.7 P
145.8 e
1973 -
1974-
-
1975-
1976-
1
- 2
June 29, 1976 263.3
H:
L:
e:
P:
P
P
310.2 P 187.4
quarterly high of index of 1973 or
quarterly low of index of 1975
estimated
provisional
23.
P
264.7
P
1974
Quarterly figures are averages of weekly data.
L
141.5
IV - 13
cent in the composite index.
It is less than one per cent below its
all-time quarterly hi h at the end of 1974,
relative food price index is
whereas the (deflated)
currently 10 per cent below its
peak, which was also in the fourth quarter of 1974.
quarterly
The commodities
whose prices are given the largest weights in the food index
are coffee,
sugar,
beef,
soybeans and soybean meal,
corn and wheat.
The price of coffee has more than doubled following the July 1975
frost that destroyed millions of coffee trees in Brazil.
(It will
be 1979 or 1980 before world coffee production again reaches 1974
levels.)
Sugar,
soybean,
corn and wheat prices have risen recently,
partly because of the drought in Western Europe.
however,
are still
bubble of 1974.)
far below levels recorded in
(Sugar prices,
the speculative
Soybean prices have also risen because American
farmers are reported to have planted 10 per cent fewer acres
of
the crop and because Brazilian soybean exports have been smaller
than expected.
Beef prices are currently lower than in 1975 as
lower feed costs and higher beef prices induced cattle feeders
to increase production.
The industrial raw materials
31 per cent over its
quarterly low in
its quarterly peak in 1974.
materials,
index has increased by
1975 but is
still
well below
The relative price of industrial raw
as measured by the deflated index,
per cent over its quarterly trough in 1975.
has increased by 24
Prices of commodities
IV - 14
classed as industrial raw materials have risen less sharply and more
uniformly across commodities.
have exceeded levels reached in
An exception is
cotton prices, which
late 1973 and early 1974,
possible crop damage by bad weather in
reflecting
cotton producing regions of
the United States and fears of a poor Soviet cotton crop,
together
with stronger demand associated with the recovery from world
recession.
The record high volume of futures trading at U.S.
in
markets
June may be evidence that commodity speculation has recently
increased.
It is difficult, however, to distinguish hedgers from
speculators in such markets; and hedging would be expected to
increase as the volume of economic activity picks up.
investors,
as a way of avoiding exchange controls,
Some British
used sterling to
buy futures contracts on the London Metal Exchange in April and May
as the pound was falling.
While this gave them a method of hedging
against future pound depreciations, it may have temporarily caused
not only the pound-denominated but also the dollar denominated
prices of copper and zinc to increase faster than supply and demand
conditions would justify.
to halt what it
(The Bank of England threatened to move
saw as "speculative trading" in
any commodity on
the London Metal Exchange when speculative transactions accounted
for more than 30-35 per cent of total business.)
Nonetheless, there
is no convincing evidence yet that speculators have had a major
effect on commodity prices in 1976.
IV - 15
Monetary conditions in major foreign countries.
Evidence is
increasing that monetary authorities abroad are beginning to shift to
a somewhat more restrictive policy posture.
factors.
This shift reflects two
First, economic activity in the industrial countries has
been recovering more strongly than had previously been expected.
Second,
a high degree of liquidity had been generated in most countries, due
partly to earlier fairly easy or at least accomodative monetary policies
and, in some countries --
especially Switzerland --
official foreign reserve assets.
to increases in
The conjunction of a strong economic
recovery and a high degree of domestic liouidity, at a time when rates
of price increase remain high and government deficits are still large,
has created fears of an intensification of inflation.
At the same
time, however, the shift toward restriction is likely to remain modest
in most cases, given that unemployment levels remain high and are not
expected to come down quickly, and investment has not yet recovered.
The shift toward more restrictive monetary policies abroad
is indicated by an upward movement of interest rates and a slowing in
the growth of money stocks, and by the policy actions adopted.
As
shown in the following table, 3-month interest rates in several countries
are higher now than they were three months ago.
In Canada, where a
restrictive policy adopted last fall raised interest rates earlier in
that country than elsewhere, interest rates have been declining since
March.
In Italy, where interest rates were raised sharply earlier this
year in response to exchange-market pressure, there has been a sizable
decline in rates in July, though the level of rates remains extremely
3-MONTH AND LONG-TERM INTEREST RATES
IN SELECTED INDUSTRIAL COUNTRIES
(Per cent per annum or percentage points)
3-MONTH RATES
Canada
France
Germany
Italy
Japan
Switzerland
United Kingdom
United States
Level:
end-March
end-1975
1976
Apr.
1976
Change during month:
May
June July 1976
1976
1976 (to date)
Total change
since
end-March
9.25
6.50
4.20
7.63
8.25
2.75
10.38
7.63
3.70
18.25
7.75
1.25
-0.75
0.12
-0.20
-0.75
-0.50
-0.12
0
0.38
0.20
1.63
0
0.50
-0.13
-0.13
0.80
1.75
0.50
-0.75
0
-0.06
-0.20
-3.00
0
0.12
-0.88
0.31
0.60
-0.37
0
-0.25
10.81
5.25
8.75
5.00
2.00
0
0.75
0.63
-0.31
-0.13
0
0.13
2.44
0.63
9.51
9.91
7.74
11.37
9.02
14.48
8.03
9.48
9.98
6.52
12.37
8.71
13.75
7.89
-0.14
0.05
0.12
0.73
-0.03
-0.27
0.05
-0.02
-0.05
0.31
0.20
0.09
0.38
0.23
0
0.15
0.18
0.20
0
-0.18
-0.15
0.03
-0.09
0.12
n.a.
n.a.
0.05
-O.04
-0.13
0.06
0.73
1.13
0.06
-0.02
0.06
Level
Latest
9.50
7.94
4.30
17.88
7.75
1.00
(7/13 )
(7/13)
(7/14)
(7/13)
(7/14)
(7/14)
11.19 (7/13)
5.63 (7/7)
LONG-TERM GOV'T.
BOND YIELDS 2/
Canada
France
Germany
Italy
Japan
United Kingdom
United States
1/ The
Italy,
United
2/ The
United
9.35
10.04
7.25
13.50
8.77
13.73
7.96
short-term rates quoted are generally 3-month rates: interbank rates for France, Germany
and the United Kingdom; the finance company paper rate for Canada; and the CD rate for the
States. For Japan, the rate on paper of 2-month or greater maturity is quoted.
long-term rates quoted are all government bond yields -- mostly composite yields. For the
States, the 20-year constant maturity yield is quoted.
(7/2)
(7/4)
(7/7)
(6/30)
(6/30)
(7/9)
(7/13)
IV - 17
high (as,
of course,
interest rates in
does the expected rate of inflation).
Switzerland,
In
contrast,
where purchases of foreign exchange by
the Swiss National Bank have contributed to a high degree of liquidity,
remain very low.
Strengthening demand for credit seems to be exerting upward
pressure on interest rates in several countries, especially in Germany
and France.
In the United Kingdom, private demand for credit has also
strengthened in recent months, but the upward pressure on interest rates
has been counteracted by other factors.
In Japan,
a strengthening of
credit demand halted the decline in interest rates and helps to explain
some increase in rates since the end of April.
In Germany and Japan, the pattern of movement in long-term
interest rates has reflected
the movement of short-term rates; in
both countries the earlier decline in
significantly reversed in Germany.
and was
With the exception of Italy, where
yields rose sharply from already-high
countries have shown little
bond yields was halted,
levels, bond yields in other
net change since the end of iiarch.
It may
be that a downward revision of long-run expectations of inflation has
offset the general tendency for interest rates to rise.
The growth of the money stock in major foreign countries is
shown in the next table.
Rates of growth of both narrowly- and broadly-
defined money have tended to be slower in recent months than in previous
months --
quite a bit slower in France,
Japan,
and the United Kingdom.
Growth of the broader money stock in Canada is the major exception;
but the underlying growth rate of [Canadian M1] has declined from the
GROWTH OF THE MONEY STOCK IN MAJOR
INDDUSTRIAL COUNTRIES
(percentage change; seasonally adjusted)
Change from
February 1976 to
May 1976
Canada
M1,
M2
France
M
M2
Germany
-1.4
5.1
M1
M2
Japan M11
M2
Switzerland
United
3.31
3.1
.6.01/
5.2
20.21
20.3
1.
0.9
1.9
0.9
12.0
5.5
1/
0.91'
2.7
2.3
M3
United States
10.4
20.0
7.1
1.73
M1
S2.5
I.
4.51/
3.31/
Kingdom M1
Change from
May 1975 to
May 1976
-2.4
3.8
2.9
11
Change from
November 1975 to
February 1976
2
'
5.51/'
5.0
2.5
/
1.1 '
2.9S3
1
13.2
15.41 /
7. '1/2/
14.8
8.9
4.13/
9.03 /
Various national sources. Data on the Italian money stock are available only through
January, and are therefore not presented.
1/ Changes shown are from January to April, October to January, and April to April, respectively.
2/ Not seasonally adjusted.
3/ Changes shown are from March to June, December to March, and June to June, respectively.
IV - 19
high levels of late last year and is now near the bottom of the 10-15
per cent target range announced by the Bank of Canada last November.
The Bank of Canada has indicated that it may lower that target range
"before long."
Many countries have been acting either to reduce what is deemed
to be excessive domestic liquidity or, at least, to stop liquidity from
increasing further.
problem.
Swiss authorities evidently face the most difficult
In order to moderate the upward movement of the Swiss franc,
Swiss authorities have intervened heavily in the exchange market.
To
offset the liquidity generated by sizable official purchases of foreign
exchange, the Swiss authorities have:
(including a 2-1/2 year,
(1) encouraged capital outflows
750 million Deutsche-mark --
loan by Swiss banks to Germany);
$290 million --
(2) issued long-term bonds to finance
future government deficits, and sterilized the proceeds,
announced
and (3)
an increase in minimum reserve requirements against foreign liabilities,
from 10 to 65 per cent (effective July 26).
It
remains to be seen
whether even these measures can hold the growth of M1 down to the 6 per
cent target rate this year.
Japanese authorities have also been faced with the choice
between increasing foreign exchange reserves -- and consequent liquidity
creation --
or an unwanted appreciation of the exchange rate.
The
Ministry of Finance reacted by reducing the ceiling on term loans
("impact" loans) that Japanese firms are allowed to draw from foreign
banks, and by lowering the ceiling on the amount of bonds issued overseas
IV - 20
by Japanese
firms.
However, the ceiling on new loans ("window guidance")
by the Japanese city banks, recently announced for the third quarter,
appears to be no more restrictive than in previous quarters.
The French Government recently issued a 2-1/2 billion French
franc ($1/2 billion) 15-year bond to soak up liquidity;
the issue was
fully subscribed the first day (2/3 by private nonbanks), and another
such issue is being considered for the fall.
It is reported that French
banks generally have no margin now remaining under their credit
ceilings,
so those ceilings may begin to bite; current credit ceilings imply
slightly more than a 7 per cent annual rate of growth of credit in the
second half of this year, compared with a 9-1/2 per cent growth rate
allowed in the first half (with actual growth presumably being somewhat
higher due to the elimination of spare margins within the ceilings).
The German Government renewed, on July 1, its sales of one-totwo year Treasury bonds, which had been suspended last November, and of
longer-term Federal debt, new sales of which had been dormant since
April.
Reserve requirements for commercial banks were raised by a total
of 10 per cent in two stages (May 1 and June 1); the Bundesbank characterized this move as being designed merely to offset a decline in Government
deposits at the Bundesbank.
are currently
According to Bundesbank
officials, they
"on target" so far as their 1976 target for 8 per cent
growth of "central bank money" is concerned.
In some of the smaller countries, as well, restrictive monetary
policies have been adopted primarily for domestic reasons, i.e.,
to
IV - 21
reduce the potential for inflationary monetary growth.
discount rate was raised on June 3,
In Sweden,
from 5-1/2 to 6 per cent.
the
Banks'
required liquidity ratios were effectively raised, by enlarging the
base against which these ratios apply,
and a proposal was made to apply
the ratios to financial institutions other than banks.
This tightening
was anticipated in January, when the Riksbank recommended that banks
reduce the growth of credit.
In Norway,
a gradual increase in banks'
required holdings of bonds and of primary reserves was announced in June.
Discount rates were raised in the Netherlands on June 1 and again on
June 18 -- each time by 50 basis points; the basic rate now stands at
5 per cent.
These discount rate changes were described as an adjustment
to higher domestic market rates, though the authorities also wanted to
help resist downward pressure on the exchange rate for the guilder.
In other countries,
monetary policy decisions.
external considerations have dominated
Responding to extreme downward pressure on
the lira, Italian authorities acted to reduce the monetary base, which
had risen in large part because of the sizable government deficit.
On
May 6, they imposed a temporary import-deposit scheme and, on June 4,
announced an increase (from 30 to 42 per cent) in the portion of the
growth of banks'
securities.
rose sharply.
deposit liabilities that must be invested in government
The money market tightened severely, and interest rates
More recently, however, monetary conditions have
eased significantly,
reflecting Italy's success in reversing capital
flows and the Bank of Italy's purchases of Treasury bills.
IV - 22
Interest rates in Britain rose sharply in April and May,
when
the exchange rate for sterling was under severe downward pressure.
The
Bank of England's
Minimum Lending Rate was raised by 150 basis points
on April 23 and by another 100 basis points on May
at 11.50 per cent.
The Bank renewed its
21; it
now stands
sales of gilt-edged securities,
which had been suspended in January, and engaged in some spot sales and
forward purchases of dollars (which are analagous to open-market sales
of domestic securities under repurchase agreements).
in
sterling lending to the private sector in
Some strength
the latest 2-3 months
has added to upward pressure on British interest rates.
In contrast,
signs of success in reducing the still-high rate of inflation, improving
prospects of a lower public sector borrowing requirement,
and reduced
speculation against sterling, help to account for the slightly easier
conditions
in
In
financial markets since the end of May.
Denmark there is
a severe credit squeeze.
Many banks are
exceeding their credit ceilings and therefore must place an amount equal
to the excess in a non-interest-bearing account at the National Bank.
Thus,
Danish firms are being forced to borrow abroad,
major objective of the tight monetary policy,
current-account deficit.
which is
the
given the large Danish
@FedFRASER