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CONFIDENTIAL (FR)
CURRENT ECONOMIC
and
FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
By the Staff
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
July 1,
1964
CONFIDENTIAL (FR)
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
By the Staff
Board of Governors
of the Federal Reserve System
July 1,
1964
I - 1
IN BROAD REVIEW
The domestic economy has continued to perform well, although
some very recent data suggest a moderate slowing of momentum from the
rapid rate of expansion in April and May.
without a sense of calculating caution.
Confidence is high but not
Consumer buying has been
maintained at an advanced level and business commitments for fixed
capital have been expansive but not exuberantly so.
have continued conservative.
Inventory policies
The tax cut continues to exert a stimulative
influence, but Federal spending has been below earlier Budget projections.
In June bank credit expanded further and the money supply
grew at an accelerated rate, notwithstanding an unusually large
build-up in U.S. Government deposits after the tax date.
Markets for
fixed return securities have continued firm with yields in some areas
recently showing a downward tilt.
Prices of common stocks have
recovered to about earlier highs; profits have been strong with profit
margins increasing.
Industrial commodity prices seem to have settled back into
their rut of little change.
Labor costs in manufacturing also have
remained stable as the rise in earnings and fringe benefits has
continued within the bounds of productivity gains.
Prospective supplies
of most commodities, equipment and labor seem adequate to permit
further gains in activity without undue pressure on resource
availability.
The U. S. balance of payments deficit for the first half of
this year now estimated to exceed $2 billion, seasonally adjusted annual
rate.
The exceptionally large adverse balance in April was followed
I-
2
by smaller deficits in May and three weeks of June, running more or
less in line with the $2 billion rate of deficit.
Abroad, there is further evidence of the leveling off in
import buying of other industrial countries as noted in earlier reports.
More specific facts of particular interest which have become
available recently include:
-- Retail sales, although sharply above a year earlier,
apparently did not maintain in June the record level
reached in May. Auto sales drifted down a little
from an advanced level.
-- Consumer attitudes and buying plans reflected a
mixture of optimism and moderation in the May-June
survey of the Michigan Research Center.
-- Personal income rose further in May but less than
in the two preceding months.
-- Wholesale prices edged up in June but remained
virtually unchanged from a year earlier or from
the averages for the years 1958 through 1963.
Industrial prices, despite continued strength in
some materials, remained no higher than last
December.
-- New orders for durable goods declined in May following
a sharp increase in April; orders for machinery and
equipment, however, rose further. Backlogs again
increased.
-- Manufacturers' inventories declined in May and
accumulation in the first two months of the second
quarter was running well below anticipations.
-- New housing starts declined again in May.
-- Free reserves held moderately below the $100
million level in the latest four weeks, a little
lower than in the two preceding months; borrowings
were somewhat higher while excess reserves were
little changed.
I - 3
-- Treasury 90-day bill rates remained below the
discount rate. Yields on Treasury securities
at mid-year were below those at the end of the
first quarter.
--
Yields on municipal securities leveled off and
yields on new corporate bonds declined after early
June.
Both remained above their February-March
lows.
-- The Treasury cash balance rose to around $10
billion on June 30 and was above expectations. The
fiscal year cash deficit of about $4-1/2 billion
was significantly below earlier official estimates.
I - T-1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally Adjusted)
_, t
atest
Period
May '64
"
"
Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)
Amount
Latest Preceding
Perid Period
Period Period
%Change from:
Year
Ago
Aao
Year
Ao
o
2 Years
Ao
Mo
2.2
-10.7
-3.0
4.8
2.3
2.4
6.7
3.8
74.6
3.8
5.1
74.6
4.0
5.4
73.0
4.3
58.5
17.3
7.7
33.5
58.5
17.3
7.7
33.5
57.1
17.1
7.6
32.4
2.5
1.3
1.6
3.4
Industrial production (57-59=100)
Final products
Materials
130.3
130.0
130.4
129.6
129.4
129.5
124.5
123.5
125.7
4.7
5.3
3.7
10.1
8.9
11.1
i
Wholesale prices (57-59=100)Industrial commodities
100.1
100.8
99.2
96.8
100.3
100.0
100.4
0.1
0.4
2.5
-1.6
-0.1
0.0
1.4
-1.2
1.5
1.3
1.2
2.0
2.5
1.6
2.2
3.8
3.3
3.8
5.4
6.5
Nonfarm employment, payroll (mil.)
Manufacturing
Other industrial
Nonindustrial
Sensitive materials
Farm products and foods
Consumer prices (57-59=100)
/
100.8
99.3
97,8
5.9
96.8
98.4
107.8
104.3
195.5
114.9
107.8
106.2
104.3
105.7
114.8
103.0
104.2
112.6
2.52
102.46
2.51
102.47
Personal income ($ bil.)-2/
484.8
483.6
460.1
5.4
10.0
Retail sales, total ($ bil.)
Autos (million units)2/
21.7
7,814
5.0
21.4
7,726
4.9
20,2
7,232
4.4
7.4
8.0
13.9
10.8
17.7
16.0
1,501
40.7
20.1
3.0
1,515
40.7
20.5
2.9
79,94
1,618
40.5
18.7
2.6
70.14
-7.2
0.5
7.3
13.4
-0.9
0.5
16.7
23.0
15.1
28,1
Commodities except food
Food
Services
"
"
Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)
GAF ($ bil.)
2.44
98.74
Selected leading indicators
Housing starts, pvt. (thous.)2Factory workweek (hours)
New orders, dur, goods ($ bil,)
New orders, nonel. mach. ($ bil.)
Common stock prices (1941-43=10)
Inventories, book val. ($ bil.)
Gross national product ($ bil.)
2/
Real GNP ($ bil., 1963 prices)2/
jf
I/
Not seasonally
adjusted,
seasonally adjusted.
Not
*~I
2/
80.72
Apr.'64
105.4
105.0
101.2
4.2
8.4
Q.I '64
S
608,0
600.6
600.1
595.4
571.8
575.7
6.3
4.3
11.7
8.2
Annual rate.
Annual rate.
I - T-2
SELECTED DOMESTIC FINANCIAL SERIES
Indicators
IndicatorsJune
Money Market -
/
Week ended Four Week Last six months
Average I
igh I Low
26
(N.S.A.)
3.50
3.47
117
232
3.50
3.48
78
278
3.50
3.60
239
558
2.00
3,44
18
135
Security Markets (N.S.A.)
Market yields1/
5-year Government securities (per cent)
20-year Government securities
Corporate new issues, Aaa (per cent)
4.02
4.16
4.41
4.02
4.17
4.43
4.21
4.26
4.53
4.00
4.16
4.30
Corporate seasoned, Aaa (per cent)
4.41
4.41
4.41
4.35
3.11
n.a.
3.10
n.a.
3.16
5.44
3.07
5.44
81.46
3.01
80.24
3.05
81.46
3.10
75.50
2.96
Federal funds (per cent)
Treasury bills 3 mo., yield (per cent)
Net free reserves2/ (mil. $)
Member bank borrowings2l (mil. $)
Municipal seasoned, Aaa (per cent)
FHA home mortgages (per cent)
Common stocks - S&P composite index 3 /
Prices, closing (1941-43=10)
Dividend yield (per cent)
Change
Average
in
change--
May
Banking (S.A., mil. $)
Total reserves
Bank loans and investments:
Total
Business loans
Other loans
U. S. Government securities
Other securities
Money and liquid assets:
Demand dep. & currency 4 /
Time and savings dep./ 7
Nonbank liquid assets
last 3 mos.
Annual rate of
change
3 mos.
(%)
I 1 year
2.8
-27
46
2.7
1,700
1,700
8.2
7.6
400
300
7.5
10.7
1,500
-500
300
1,500
-300
200
18.2
-5.9
5.6
14.0
-6.1
12.5
1,100
1,300
400
470
1,000
1,700
3.6
10.4
6.6
3.6
13.5
7.1
N.S.A.--not seasonally adjusted. S.A.--seasonally adjusted. n.a.--not available.
1/ Average of daily figures. 2/ Averages for statement week ending June 24.
4/ Based on tentative estimates for
3/ Data are for weekly closing prices.
June which are derived from incomplete data.
I - T-3
U.S. BALANCE OF PAYMENTS
--
-1964
May
Apr.
Q-1
Mar.
1962
1963
Year
Q-IV
Year
Seasonally ad usted annual rates, in billions of dollars
-
Balance on regular trans.
2h
2/
Exports
Imports
Trade balance
- 18.3
5.8
/
.7
-
1.6
-
3.3
-
3.6
24.3
23.6
21.9
20.5
- 18.1 - 17.
6.5
6.9
- 17.5
6.1
- 16.9
5.0
- 16.1
4.3
2k
Unadjusted monthly averages, in millions of dollars
Balance on regular trans.
Trade balance 1/
Securities transactions
Bank-reported claims 2/
Other
Financing, total
Specias receipts 3/
Liabilities increase:
To nonofficial 4/
To official
Monetary reserves decrease
of which: Gold sales
3/
-116
-475
370
21
-146
-275
-298
542
-104
-159
-754
518
- 2
-239
93
583
- 9
-209
-344
529
19
-263
-431
413
- 69
-117
-502
361
- 80
- 39
-540
116
475
-370
- 21
146
275
298
0
0
42
65
88
57
95
-143
684
-166
91
10
50
17
217
-204
-123
-160
50
136
59
-123
(- 32)
- 17
(15)
2
(13)
32
(38)
128
(74)
- 87
- 5
42
(33) (-177)
-
Balance of payments basis; differs a little
from Census basis.
Adjusted for changes in coverage and for long-term claims taken over from
nonfinancial concerns.
Other than nonmarketable bonds, which are included in liabilities
to
official. Advances on military exports are assumed as zero for individual
months in absence of information.
4_/ Including international institutions (except IMF),
private nonbank.
commercial banks and
II - 1
THE DOMESTIC ECONOMY
Prices.
The wholesale commodity price index edged up in
June but was virtually unchanged from December and from June, 1963.
In late June, at 100.4 per cent of the 1957-59 average, the index
was little changed from the annual averages for 1958 through 1963.
Average prices of foodstuffs rose about one per cent in June
as a decrease in marketings of meat animals was accompanied by increases
of about five per cent in prices of livestock and meats.
Market
supplies of livestock continue appreciably greater, and prices
moderately lower, than at this season of the past several years.
Prices of winter wheat declined sharply further in adjustment to the
new Federal program for wheat that began on July 1.
While the program
continues to support income of wheat producers and costs to flour
millers apparently are higher, the Federal loan rate and market prices
are substantially below a year ago.
Industrial commodity prices in June remained at the level
reached last December--a level one-half per cent above the early months
of last year but no higher than at the business recession low in early
1961 and one-half per cent lower than in early 1960.
In recent weeks
there have been some price decreases among cotton textiles, influenced
by the lower cost of cotton for domestic use resulting from recent
legislation.
Steel scrap prices have increased and upward price
pressures continue to be apparent in markets for some nonferrous
metals, although lead and zinc have been stable and copper in the more
speculative markets is below the highs of two months ago.
Tin prices
II-
2
rose sharply in the first half of June and reached levels almost as
high as in February before sales from the U.S. stockpile were increased.
Market supplies and prices of major nonferrous metals will
be strongly influenced for some period ahead by current labor contract
negotiations in the copper industry and by the outcome of legislation
to authorize sale of metals from the Government stockpile.
Labor
contracts in copper generally expired on June 30, but production and
negotiations have continued.
Interruption to the flow of copper would,
of course, intensify upward pressures on prices; on the other hand,
settlement without a strike might ease pressures, if much of recent
strength has reflected inventory demands because of the strike threat.
On the "stockpile front," the House has approved measures to permit
the sale of sizable quantities of lead and zinc as well as the remaining
tin in the stockpile.
The consumer price index was unchanged in May and remained
1.5 per cent above a year earlier.
Retail prices of foods, chiefly meat
and eggs, declined somewhat in May while prices of services edged
up further.
The average for all nonfood commodities was unchanged
with prices of appliances and textile house furnishings a little lower
and those of apparel a little higher.
Unit labor costs.
Productivity and labor costs per unit of
output in May continued their favorable trends.
With manhours in
manufacturing relatively stable and output rising,
output per manhour for all employees has continued to advance at a
rapid rate.
The average annual gain for the first five months of this
II-
3
year over the same months last year was 4.3 per cent--somewhat higher
than the rise of 3.8 per cent for all of 1963.
So far this year hourly earnings also have followed much
the same trend as last year, with no acceleration in the increase in
wage rates.
Hourly earnings in May rose to $2.53, 2 cents an hour
more than in December 1963.
In the same period last year, hourly
When fringes and salary income are also
earnings went up 3 cents.
included, unit labor costs in manufacturing were little changed both
from April and from a year earlier.
Employment.
Nonfarm employment in both the household and
establishment series rose further in May but the gains were significantly
smaller than in earlier months this year.
Some tapering off is apparently
under way in the rate of expansion in employment.
The increase of 40,000 in May at nonfarm establishments was
the smallest rise by far this year.
Nonfarm employment was 1.4 million
higher than a year earlier, as compared with a year-over-year margin
of 1.7 million in February.
There was little change in manufacturing employment between
April and May.
Some further advance in machinery and electrical
equipment employment was offset by declines in industries producing
construction materials.
Employment in transportation equipment and
primary and fabricated metals--which had accounted for a large
proportion of earlier gains in the manufacturing sector--stabilized
in May.
In other industries changes were small, and in both directions.
II - 4
Employment in nonmanufacturing activities increased
moderately in May following a more sizable advance the previous
month.
In addition to a small decline in retail trade, employment
was lower in contract construction, partly owing to strikes.
However,
demand for labor continued strong in State and local government,
services, and finance.
The average workweek in manufacturing at 40.7 hours,
seasonally adjusted, remained unchanged for the third consecutive
month.
This over-all stability reflected little change in most
durable and nondurable goods industries.
Weekly hours in primary
metal industries edged up slightly further in May to a high for
the year.
In contrast, the workweek in the transportation equipment
industry declined somewhat, as overtime was curtailed, and was below
the high levels of a year earlier.
Consumers
In the consumer sector, recent developments include (1) the
quite small May increase in personal income as well as employment;
(2) continued gains in purchases of nondurable goods, probably reflecting
in part the effects of tax reduction; and (3) a tendency for purchases
of automobiles and other durable goods to level off.
A sizable
further increase in total consumers purchases in the second quarter
resulted primarily from nondurable goods and services.
The latest
survey of the Michigan Research Center found consumers optimistic but
did not see any "spending splurge" in prospect for autos, houses, and
major household goods.
II - 5
Personal income.
Personal income in May advanced further,
but the rise was smaller than in the two preceding months.
Wages and
salaries continued to rise at a moderate pace in most nonindustrial
activities.
Manufacturing payrolls, however, were barely up as
employment rose only a little further and the average workweek was
Other major components of personal income were either
unchanged.
unchanged or up slightly.
Retail sales.
Retail sales in June appear to be off slightly
from their May peak, after allowance for normal seasonal variation.
However, the second quarter monthly average was about 1 per cent above
the first quarter.
The estimated decline in June is attributable to durable goods
sales.
Both automotive and furniture and appliance sales were below
their May levels; for the quarter as a whole, sales at these outlets
showed little change.
On a unit basis, figures for the first 20 days of the month
suggest that the number of new domestic cars sold declined moderately
in June to an annual rate of 7-1/2 million.
This rate compares with
7-3/4 million through the first 8 months of the model year (October-May)
and about 7-1/4 million in the 1963 model year.
Dealer stocks increased
somewhat, as they usually do in the early part of June, and remained
about a fourth higher than a year ago.
June sales at nondurable goods stores, in contrast, were
slightly above their May peak, mirroring sharp gains at food outlets.
For the second quarter such sales were a strong 2-1/2 per cent above
the first quarter, with sizable increases in outlets for apparel,
gasoline, general merchandise, and food.
II - 6
Consumer credit.
The first reports coming in for May
suggest that instalment credit extensions continued to rise while
repayments probably showed little change, on a seasonally adjusted
basis.
Extensions of auto credit in particular accelerated a little
more than repayments.
A rise in extensions of credit by commercial bank lenders
seems to have continued into June, weekly data suggest.
Sales finance
company business apparently also held up well through May; no June
figures are yet available.
Returns from a scattering of retailers
indicate some leveling-off in May in the rate of credit extensions.
Instalment debt repayments moved up from the first quarter
to the second and their ratio to disposable personal income apparently
remained close to 14 per cent.
Collection experience has continued good.
The seasonally adjusted moving average of commercial bank delinquency
ratios has now registered three successive months of improvement in
most categories and four months in some.
The seasonally adjusted increase in instalment credit
outstanding was probably a little larger in May than in April but seems
unlikely to have matched the highs of last February and March.
Other consumer credit, including charge accounts, turned up in April
after a dip in March, the first month following the tax cut; results
for May are not yet available.
Consumer surveys. "Consumer attitudes in May-June 1964 are
characterized by optimism as well as moderation,
according to the
Survey Research Center's latest survey of consumer attitudes and
II - 7
inclinations to buy.
The index of consumer sentiment remains near
the 7-year peak reached early this year.
Plans to buy autos, houses,
and major household goods are somewhat above year-earlier levels,
suggesting, according to the Survey Research Center, "that a high
level of sales, but no spending splurge, is in prospect.
These plans
are broadly consistent with the actual pattern of consumer purchases
in recent months.
The preceding (January) survey found that the tax cut was
widely anticipated and was contributing to the unusual optimism at
Expectations regarding business conditions remain decidedly
that time.
optimistic, and the proportion of families that feel they are better
off financially than a year earlier has risen sharply since the
beginning of the year.
While the tax cut was undoubtedly an important
factor in this substantial heightening of financial well-being,
consumers tended to attribute the improvement almost entirely to
other factors, such as pay raises, better jobs, or overtime.
In tending to minimize the contribution of the tax cut to
their financial well-being, consumers attributed few major spending-or savings--decisions to the tax cut.
"For the most part consumers
seem to be pursuing goals--consumption as well as savings goals-which they set for themselves prior to the tax cut."
It may be commented that these survey findings are hardly
surprising.
The tax cut made a marginal contribution to consumer
after-tax incomes and for wage earners generally the weekly addition
was small in dollar terms.
The test of the efficacy of the tax cut
will be what consumers in the aggregate actually do, rather than how
they now evaluate what appear to be small sums to them.
I
- 8
Business
Demands in the business sector continue to exhibit the
orderly tendencies generally prevailing during this cyclical expansion.
Incoming orders to durable goods producers were off in May but were
at very high levels.
Manufacturers' inventory policies continue
conservative and stock-sales ratios declined further.
Manufacturers' inventories and shipments.
The seasonally
adjusted book value of manufacturers' inventories declined about $100
million in May, following an increase of $200 million in April.
The
net increase of only $100 million for the two months is far below the
anticipated rate of accumulation for the second quarter and about
equals the low monthly rate in the first quarter.
In the Commerce May
anticipations survey, a book value increase of $400 million was
projected for the second quarter.
The May inventory decline was concentrated in nondurable
goods industries, where shipments showed an appreciable further increase
to a level 4 per cent above the first quarter.
This is larger than the
increase expected by nondurable goods manufacturers in the anticipations
survey; the inventory decline accompanying these unexpectedly large
shipments may have been involuntary.
The run-up in shipments of
nondurable goods producers is in line with retail sales developments.
The rise in nondurable goods shipments in May more than
offset a small decline in durable goods industries, and total
manufacturers' shipments increased slightly further. With inventories
down somewhat, the over-all manufacturers' stock-sales ratio declined
further to a new low for this expansion period.
II-
9
STOCK-SALES RATIOS
(In per cent)
y
Manufacturing, total
Durable goods
Nondurable goods
Orders.
1964
1__st qtr. average
1.62
1.89
1.34
1.65
1.89
1.39
1963
average
1962
average
1.69
1.95
1.41
1.70
1.97
1.42
Seasonally adjusted new orders received by manufacturers
of durable goods in May declined 2 per cent following a 6 per cent
advance in April to a record level.
Sizable reductions were reported
by the auto and primary metals industries.
New orders for equipment
increased sharply further, as a result of a large run-up in railroad
equipment and shipbuilding, and there were moderate gains in the
machinery industries.
New orders for primary metals had shown a pronounced and
rather inexplicable bulge in April, accounting for nearly half of
the large rise in total durable new orders in that month.
The
drop in May brought the order level for primary metals back to the
first quarter rate.
New orders had also spurted in the auto industry
in April.
New orders remained appreciably above shipments and the
order backlog increased for the fifth consecutive month.
orders for durable goods were 3 per cent above May 1963,
Unfilled
when the steel
backlog was unusually large, and 5-1/2 per cent larger than at the
end of last year.
II - 10
Construction and real estate.
Private housing starts--
including farm--edged off further in May, following a 3 per cent
downward revision in the already reduced rate for April.
On a three-
month moving average basis, starts still rounded to 1.6 million in
the most recent period and were almost a tenth below the recent high
in September-November.
Seasonally adjusted building permits, which had also dropped
sharply in April, were maintained in May.
Permits for structures
of 5-or-more families continued downward, however, and were threetenths below their peak in December of last year.
PRIVATE RESIDENTIAL STARTS AND PERMITS
Hay
(thousands
of units) 1/
Per cent change from:
Month ago
Year ago
Starts (total)
1,501
-1
-7
Permits (total)
1
- family
2-4 "
5 or more
1,258
734
99
425
-+4
--6
-5
-3
-15
-7
1/
Seasonally adjusted annual rate; preliminary.
Mortgage markets.
Mortgage markets have continued to show
little change in recent months.
In May, secondary market purchases
by private investors from the Federal National Mortgage Association
remained well below the unusually high levels of a year ago, and
yields on 30-year FHA-insured mortgages were maintained at an average
of 5.45 per cent.
II - 11
In the primary market, contract rates for conventional first
mortgages on new homes were also steady, (at 5.80 per cent) while
those for existing homes returned to their earlier level (5.85 per cent)
after a slight rise in April.
With competition for mortgages continuing,
maturities and loan-to-value ratios have held near the highs reached
earlier this spring.
While average loan amounts dipped somewhat in
April to $17,200 for new homes and $13,200 for existing homes, they
were both about 8 per cent higher than in April last year.
Foreclosures on nonfarm real estate--mainly homes--rose
moderately in the first quarter of this year and were 8 per cent
above a year earlier.
The year-to-year increase was the smallest in
recent years, reflecting an indicated decline in foreclosures on
conventional mortgages.
NONFARM MORTGAGE FORECLOSURES
Number
(thousands)
1964 first quarter
"
"
1963
1962
"
"
1961
"
"
1960
"
"
101.4
94.0
83.7
67.6
45.0
Rate per thousand
mortgaged homes
4.5
4.4
4.1
3.5
2.4
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED
ENT
GROSS NATIONAL PRODUCT
BILLIONS
F DOLLARS
ANNUAL RATES
650
QI 608.0
--
--0.
°°
600 6
'
00
1963 DOLLARS
550
,
CURRENT DOLtARS
S500
1959
1961
1963
1 I J. 450
INDUSTRIAL PRODUCTION -I
WORKWEEK AND LABOR COST IN MFG.
140
1957 59.100
AVERAGE WEEKLY HOURS:
MAY 407 -
MAY
1303 130
MAY
130 4
__
_
-
40
_
SPRODUCTION WORKERS
TOTAL
-
--
120
MATERIALS
---
38
TOTAL UNIT LABOR COST_
1957-59100
A\
..
1959
_/
lilu
_WJ
1961
1963
- 00
O0l
I
A
7 j
1959
ALL EMPLOYEES
|
1961
MAY 98 3
1963
PRICES
1957-59-100
00
NOT
A
C
I
CONSUMER
MAY 107 8
ALL ITEMS
--
1
i
1959
1961
1963
6l;fii
llI
95
6/30/64
II-
C-2
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED
'ERSONAL INCOME AND RETAIL SALES
NEW ORDERS AND HOUSI
ANNUAL RATES
3
MO MOVING AVERAGE
I1.1
RETAIL SALES
..
1960 61.100
1963
1961
1959
BUSINESS INVESTMENT
BILLIONS O DOLLARS
MAY 0
4
MAY 134 0
.
NEW U S AUTOS
MAY 1247
SI l"
unit
I-
-
GA
\.
--
CA 'ITAL APPROPIATIONS
G A A
SEASONALLY
PANNEDE
DLAD
OR MACHINr4
I
I
1959
4
37
-- 90
i,,,, i
ir
'
2
ANUFACTURES--
\
I
SNEW PANTAND EIIPMEN
EXPENDITURES,
1961
1963
-~
1111111111
1959
SEASONALLY
1961
TOTAL
-
1963
2.(
ADJUSTED
00
. ANUfACTURERS
J1.DISTRIBUTORS
M- N
"
CA ITA
I
NET CHANGE IN OUTSTANDING|
APRIL 49110
I 95
19
1959
1961
1 I- 21N.0
iL i|l[TI
APR
111
1963
9519
1959
I
1961
1963
IlL 0 10
6/30/64
III - 1
DOMESTIC FINANCIAL SITUATION
Bank credit.
Total credit at city banks increased about
$2.2 billion over the four weeks ending June 24, about the same as in
the corresponding weeks of most other recent years, if allowance is
made for the late June financing last year.
Expansion during the tax
and dividend payment period was similar to that in the comparable
periods of 1962 and 1963.
The increase in early June was larger,
reflecting in part this year's auction of 1-year Treasury bills, but
the decline in the week following the tax period was also larger.
Total loans and investments at nonweekly reporting banks also increased
somewhat more than usual over the early part of June.
TAX AND DIVIDEND PERIOD FINANCING
(Two mid-June weeks)
(In millions of dollars)
1964
1963
1962
6 ,20 0 -
5,500
5,400
2,500
2,500
2,500
+2,222
+1,915
67
+2,290
+1,779
+ 131
+2,056
+1,348
+ 498
+ 374
+ 380
+ 448
Business loans
Treasury bills
Loans to Govt. security
dealers
Loans to finance companies
+ 642
+ 76
+ 527
+ 139
+ 537
+ 204
+ 21
+ 642
+ 271
+ 352
+ 290
+ 234
Negotiable CD's
-
n.a.
n.a.
Corporate tax payments
Tax anticipation securities
outstanding
Net change in selected items
at weekly reporting banks
Total loans and investments
Loans
U.S. Government securities
Other securities
1/ Estimated.
319
III - 2
Credir extended by banks directly to businesses over the
mid-June period was somewhat larger this year than in the two past
years, with most of the increase accounted for by banks in New York
City.
In relation to the $700 million increase in corporate tax payments
this year, the rise in direct borrowing appears moderate, suggesting
that corporate liquidity remains sizable.
This is also suggested by
the large business loan repayments in the week of June 24, a period in
which these loans usually increase.
Banks also made substantial amounts of funds available to
businesses over the tax and dividend period through indirect channels.
While funds provided through acquisitions of Treasury bills and loans
to Government securities dealers, in the aggregate, were less than in
past years, loans to finance companies to replace maturing paper held
by corporations were much heavier (but most of this was repaid in the
week of June 24).
In addition, data for banks in New York and Chicago
suggest that some businesses relied more heavily on CD run-offs this
year than previously.
This did not create exceptional strain on the
banking system, however.
Scheduled maturities at all weekly reporting
banks over the tax and dividend period totaled about $700 million, but
banks were able to replace over half of them and outstandings declined
only $320 million.
Real estate loans at city banks continued to increase through
June at about the same substantial rate as in other recent months.
"Other loans," which include those to consumers, have also been rising
steadily.
III - 3
Money supply and time deposits.
Estimates based on incomplete
data indicate that the seasonally adjusted money supply increased about
$1.1 billion in June following a small reduction in May.
U. S.
Government deposits also increased $800 million, somewhat more than
usual.
Through the first half of 1964, money supply growth has been
at an annual rate of 3.1 per cent compared with 3.7 per cent over the
year 1963 and 4 per cent over the last half of that year.
Seasonally adjusted time and savings deposits at all commercial
banks are estimated on the basis of incomplete data to have increased
$1.3 billion in June, more than in May and about twice as much as in
March and April, when repayments of consumer credit accelerated and
the AT&T financing was absorbing funds.
Through June, total time
and savings deposits increased at an annual rate of 11.4 per cent
compared with 14.8 per cent over the year 1963.
At city banks, growth in savings deposits in June continued
to fall behind year-earlier increases.
Other IPC time deposits also
rose less than in the comparable weeks last year.
The sharp tax-date
reduction in negotiable CD's was offset in part by the depositing of
most of the $200 million proceeds of the Comsat securities issue in
time deposits, open account.
Bank reserves.
Free reserves averaged $78 million over the
four weeks ending June 24, a little below the averages of other recent
1/
months,/
Excess reserves at $356 million were about the same as in
1/ Based on the average of daily figures for all of the reserve weeks
ending in the month as used in the reserve memorandum to the FOMC,
rather than an average of all changes in the calendar month.
III - 4
April and May but considerably below earlier levels; borrowings at
$278 million were somewhat higher than in the two previous months but
still below prevailing levels of earlier 1964 and late 1963.
The
effective rate on Federal funds remained consistently at 3-1/2 per cent
over the four weeks ending June 24; only on one day were there transactions below this level.
Seasonally adjusted reserves against private demand deposits
increased in June after decl-ining in May.
The level of these reserves
in the week ending June 24 was still below the peak April 22 level,
however.
Reserves supporting U. S. Government deposits showed their
usual increase late in June, more than offsetting earlier declines.
Corporate and municipal bond markets.
Markets for corporate
and State and local government bonds have also been generally steady
in recent weeks.
While yields on high-grade municipals and new issues
of corporate bonds (adjusted to an Aaa basis) rose slightly in late
May and early June, new corporate issues have declined in yield since
then, and yields on municipals have levelled off.
BOND YIELDS
(In per cent)
Corporate Aaa
New
1964 - High
Low
4.53(5/8)
4.30(2/21)
May Low
4.43
June High
Latest Week
4.45
4.41
Seasoned
4.41(5/1)
4.35(2/28)
State & local
Bond Buyer
lMoody's
(Mixed qualities)
Aaa
3.16(3/26)
3.07(5/21)
3.32(3/19)
3.13(1/30)
4.41
3.07
3.16
4.41
4.41
3.11
3.11
3.21
3.21
III - 5
The recent stability of municipal yields reflects the ample
supply of securities available for sale and the already low yield level-only 4 basis points above the 1964 low.
Dealers' advertised inventories
of unsold securities have persistently totaled more than $600 million;
the volume of new offerings in June was well above May; and July offerings
may continue close to the June level.
In the corporate securities market, on the other hand, public
offerings of bonds reached a 1964 monthly peak in May, dropped back
during June, and are expected to decline considerably further in the
period immediately ahead.
Unsold syndicate balances totaled more than
$100 million early in June, but have since been cut to about half that
size.
Increased demands from pension funds have reportedly helped
to clear the market of this older supply.
BOND OFFERINGS 1/
(In millions of dollars)
Corporate
Public
Private
offerings
placements
1964
1963
1964 1963
State & local govt.
1964
1963
Jan.-April
Mo. average
340
372
413
440
990
May
June
47Qe/
460e/
550
459
3801/
650d /
694
675
650R/
8500 /
July
250 /
279
350-/
431
800-900Y
1/
954
961
1,074
920
Includes refundings--data are gross proceeds for corporate offerings
and principal amounts for State and local government issues.
Corporate finance.
The recent upward revision in anticipated
plant and equipment expenditures does not of itself mean that needs for
long-term external business financing have increased.
First, most of
the upward revision is in industries (motor vehicles, petroleum, and
III - 6
chemicals) that customarily rely heavily on internal funds and resort
only irregularly to the capital markets.
Public utilities, on the
other hand, have made only slight changes in their spending plans,
and plans of the communication, commercial and other group have been
reduced slightly.
Second, corporate internal funds are running higher
than expected and are likely to be as large relative to plant and
equipment outlays this year as they were in 1963, even if undistributed
profits for the year as a whole are no higher than the first quarter rate.
INTERNAL FUNDS AND CAPITAL OUTLAYS: NONFINANCIAL CORPORATIONS
(Billions of dollars)
Internal Funds
Undistributed
profits
Depreciation
Total
Plant and
equipment
outlays
1962
1963
27.8
29.6
7.0
8.1
34.9
37.7
32.0
34.0
1/
1964 1st Quarter-
30.7
10.5
41.2
37.0
31.5
(10.5)
(42.0)
38.2
Year (est.)
1/ Seasonally adjusted annual rate.
Internal funds were roughly $2-1/2 billion larger in the
first quarter of 1964 than in the final quarter of last year, due
mostly to the effect of the tax cut.
In addition, depreciation allowances
maintained their steady growth, and profits before taxes reached a
new peak as corporate sales continued to rise and profit margins
increased further.
The seasonally adjusted rate of profits (before
taxes) to sales for manufacturing corporations was 9.1 per cent in
the first quarter.
Except for the unusual second quarter of 1959,
this is the first time the profit/sales ratio has been as high as 9
per cent since early 1957.
III - 7
Even if the large profits of early 1964 do not continue
throughout the year, undistributed profits for the year as a whole are
expected to exceed their 1963 level.
For undistributed profits to
be no larger than in 1963 would require a 20 per cent drop in profits
before taxes in the second half of the year.
Stock market.
Common stock prices, as measured by Standard
and Poor's composite index of 500 stocks, have fully recovered the
declines experienced from mid-May to early June, and have recently
moved to a new all-time high of 81.69 up 3.9 per cent from the early
June low.
Trading volume has picked up since early June to average
4.6 million shares per day in the latest week.
Savings and loan associations.
Preliminary data for May
indicate that the net inflow of savings to savings and loan associations
slightly exceeded the inflow for May a year ago.
This represented
a change from the first four months of the year, when net inflow
lagged consistently behind the comparable months a year earlier.
Some
commentators have interpreted this reversal in year-over-year relationships
as evidence that the tax cut has recently expanded the flow of savings
to depositary institutions.
The indicated shift, however, is probably
attributable more to changes in the monthly pattern of savings flows
last year than to current developments.
During the first quarter of 1963 net inflows to savings and
loans were in record volume, following increases in dividend rates
announced by a sizable number of associations around the start of the
year.
But in the second quarter, with which year-over-year comparisons
are now being made, net inflows dropped back somewhat, as the Home
III - 8
Loan Bank Board sought (through moral suasion) to roll back rate
advances and as some associations experienced difficulties investing
their increased savings flows.
Making rough allowance for seasonal influences net savings
flows to savings and loan associations are indicated to have slowed
in the second quarter of 1963; since then,monthly inflows have
changed relatively little.
U. S. Government finance.
The Treasury's cash balance,
which amounted to $10.1 billion on June 30, is substantially above
expectations.
This is due primarily to lower than expected expenditures,
concentrated in defense outlays.
In the postwar period, a mid-year
cash balance of this magnitude was exceeded only in 1963, when the
Treasury had just sold $1.9 billion of new Treasury bonds.
The
current large balance caused the Treasury to state on June 25 (in
connection with the announcement of its customary monthly one-year bill
offering) that additional cash requirements for the summer appeared
lower than previously forecast and that it would delay announcement
of new borrowing plans.
Such an announcement is not likely until the
week after the July 4 weekend, or later.
The restraint on spending during the past several months
apparently will result in cash payments for fiscal year 1964 some
$2.5-$3.0 billion below projections in the January budget document.
Cash receipts for the fiscal year will exceed expectations (after
allowing for the delay in the tax cut) by only $300 million, as there
has been no indication of any significant step-up in individuals'
III - 9
withholding or in their declarations to make up for the underwithholding implicit in the new tax law.
Reflecting these developments,
the cash deficit for fiscal 1964 should be around $4.5 billion, somewhat
above last year's $4 billion deficit but below the $5.8 billion deficit
of fiscal 1962.
With knowledge of the improved Treasury cash outlook
becoming more widespread, the market for U. S. Government securities
continued steady to firm during recent weeks.
Following minor tax
date pressures, Treasury bill yields declined with the 3- and 6-month
issues closing on June 30 at 3.48 and 3.52 per cent, down 2 and 7
basis points respectively from June 17, the last FOMC meeting date.
Continued strength in the bill area--in the face of sizable dealer
awards in recent auctions--in part reflected System purchases in
the market totaling $613 million in the period.
But demand from public
funds and corporations also was in evidence.
YIELDS ON U. S. GOVERNMENT SECURITIES
(Constant maturity series)
Date bids) 3-month
closing
bills 6-month
bills
(closing bids)
3
years
5 years
10 years
20 years
bills
bills
June 28
2.99
3.06
3.61
3.82
4.00
4.03
Dec. 31
3.51
3.64
4.05
4.06
4.14
4.19
1964
Mar. 31
June 17
June 30
3.51
3.50
3.43
3.94
3.59
3.52
4.16
4.02
3.95
4.16
4.02
4.01
4.23
4.18
4.15
4.24
4.17
4.15
1963
Against the background of a generally firm market, there
was a little backing and filling in the intermediate-term area of the
note and bond market in response to rumors of possible Treasury
III - 10
financings.
Price movements were quite small, however, and the
Treasury's June 25 statement was followed by some price improvement.
At mid-year, yields remained well below levels obtaining at the end
of the first quarter, when the market's view of the outlook for note
and bond prices was more bearish than it is now.
nF-
1
U
FINANCIAL DEVELOPMENTS - UNITED STATES
BANK RESERVES
LIQUID ASSETS HELD BY PUBLIC
.....
. IIIII
I1LLIONS OF DOLLARS
BILLIONS OF DOLLAR
-21
SA
MONEY
S ASUPPLY
RATIO
SC
MAY 20.41
JUNEM1556
*151
MAY 141 2
20
TOTAL
OOF
SHARES AND
DEPOSITS
- IN SAVINGS INSTITUTIONS
E S'-.34-
0-18
AY .34
-
0
1963
1961
BANK ASSETS
1959
'"ll1
-
BILLIONS OF DOLLARS
SEASONALLY ADJUSTED
RATIO SCALE
80
MAY 157 3
10
-TOTAL LOANS
T1
MAY 1161
-
ion0
LOAI IS LESS REAL ESTATE
MAY 77.1U S GOVT
-
1959_
1959
.-
-"
' -"
L/^-.<
SECURITIES
MAY 60 I
6AL
7OTHERSECURITIES
AND REAL ESTATE LOANS
_____
____ 1961
1961
----
196____
1963
\
S GOVT
BONDS
D SHORT-TERM SEC
A N SAVINGS
COMMERCIAL BANK TIME
&IlOROWeDRR'?
1959
-
/
-100
00
000
-
--1961
JUNE 118 7
JUNE 18
17DEPOSITS
I...........i
S
--1963
IV -
INTERNATIONAL DEVELOPMENTS
Preliminary indicators show a U.S.
U.S. balance of payments.
payments deficit of $230 for 3-1/2 weeks of June, following a deficit of
$115 million in May.
seasonal.
The June worsening may have been at least partly
This brings the cumulative deficit on regular transactions
for the second quarter thus far to more than $800 million of which about
half occurred in April.
With a $100 million allowance for seasonal
factors the adjusted deficit comes to more than $900 million.
For the
year to date, the deficit on regular transactions is at a seasonally
adjusted annual rate of about $2-1/
billion.
Information on developments in May and June is
certain data on capital movements.
limited to
Short-term claims on foreigners
reported by banks rose only $57 million net in May, suggesting that the
outflow of short-term bank credit remained at the reduced level to which
it
had fallen in March/April.
The May outflow on long-term bank loans
remained at the moderate April figure of $30 million, and total outflow
for five months of 1964 has been $270 million -
a rate approximately
equal to the average over the past year and a quarter.
Preliminary
indications are that the outflow on new security issues in June is down
sharply from its high April and May level; the total outflow in the
first half of 1964, now appears to be only a little
over $300 million
seasonally adjusted, the amount projected by the Balance of Payments
Information Committee three months ago.
IV - 2
Thus, currently available data for May and June
partial -
- still
quite
show no evidence of extraordinary capital outflows of the
sorts observed at various times in the first four months*
Recently released figures on the first-quarter balance of payments show that among the favorable factors in that period were a decline
from the fourth quarter in outflows on Government capital and grants of
$200 million (quarterly rate), and an increase in private investment
income of about the same amount.
Some of the decline in government
capital outflow represented a drop in aid-financed exports (in spite of
which merchandise exports rose by $200 million).
Large repatriations
of income by direct investment companies appear to have occurred late
in the quarter, apparently postponed from 1963 to take advantage of the
tax cut.
Business and financial developments abroad.
Recent data provide
signs of the effects of policies of restraint in France and probably also
in Japan; the fall of the Italian coalition government may place the
future of the Italian stabilization program in doubt.
Britain and Germany are still
Developments in
expansionary.
In late May and early June the French authorities tightened
consumer credit restrictions and raised the "super-hell" penalty discount
rate from 6 to 7-1/2 per cent, while reducing the banks
required holdings
of Treasury certificates and the liquidity ratio (lowered again in late
June).
The latter measures tend to reduce money market tightness, which
IV - 3
had contributed to the Bank of France's reserve gain of $147 million in
May.
Market tightness had been generated primarily by Treasury repay-
ments of advances at the Bank of France, made possible by reduction of
the budget deficit.
For 19 6 4 the budget deficit is now expected to be
only 3 billion francs, compared to 8.2 billion (cash basis) in 1963.
The increase in the penalty rediscount rate widens the range
within which money market rates may be expected to fluctuate,
and
emphasizes that there is to be no relaxation of the 10 per cent a year
ceiling on bank credit expansion.
In fact, any banks that exceed the
ceiling are now to suffer more severe cuts in their normal rediscount
quotas than before,
Recent signs of diminished inflationary pressures include:
stability in production - the index rose in April after
declining in the two previous months, but was only 1/2 per
cent above January;
sluggish retail sales - March/April sales were 2 per
cent below the fourth quarter;
some easing in order backlogs and in the labor market;
continued near-stability of prices - consumer prices
in April were only 0.3 per cent above January.
Externally, French monetary and fiscal policies have affected
trade as well as financial flows; imports have declined since January,
and in May were 4 per cent below the first quarter average.
The
deficit on total trade in April/May averaged $80 million per month
compared to $100 million in the preceding six months.
In Japan industrial production appears to have leveled off;
the April rise in the index, which regained only one-third of the March
decline, left it 1 per cent below February.
Imports in May were at the
first quarter average. and down 1 per cent from April.
Wholesale prices
eased slightly in May, and were 1 per cent below the peak last autumn.
Though May exports were off from the high of the previous
month, they were 7 per cent above the first-quarter average.
official foreign exchange reserves rose a little,
In June,
helped by a large
bond issue in Germany.
Recent data for Britain seem to indicate a pause in the rise
of production and retail sales.
Industrial production (revised for
earlier months, preliminary for April) is now shown as unchanged from
January through April at 126 (1958 - 100), up one point from December.
Retail sales for March and April averaged only fractionally above the
fourth-quarter level in terms of constant prices, though up 2 per cent
in value.
However,
expansionary.
economic prospects in Britain are still
definitely
In a June survey the proportion of firms expecting to
increase their capital expenditures was even larger than in the preceding survey.
In the first quarter, capital expenditures in
manufacturing and distributive trades rose 6 per cent (in constant prices),
and were 10 per cent above their 1963 average.
Private housing starts
in the first quarter were almost double their year-earlier level.
Further
impetus should come from the substantial increase in government capital
expenditures projected in this year's budget.
Imports remained stable at a high level through May.
Though
exports rebounded in May after their very low April, the export average
for the last three months was only 3 per cent above the fourth quarter
of 1963, in contrast to a 7 per cent rise in imports.
The pound sterling has continued easy in exchange markets,
and after mid-June it
dropped markedly, with the Bank of England inter-
vening only moderately to temper the decline.
The selling pressures
reportedly came both from outright sales from the Continent and from
swaps into Euro-dollars connected with tightness in that market.
Although the narrowing of the discount on forward sterling increased
the covered arbitrage advantage on U.K. vs. U.S. Treasury bills, at
one time to 40 basis points, there have been no reports of U.S. funds
moving into sterling money market investments.
In Germany, retail buying has eased off a little.
Sales in
April/May averaged slightly lower than in February/March.
Both imports and exports, as seasonally adjusted by the
Bundesbank, were down in May from the high April figures.
months together, imports averaged a little
For the two
higher than in the preceding
pair of months, while exports were not much changed.
Legislation has been passed reducing tariff duties on a large
number of items to the level of the EEC's Common External Tariff.
More
importantly so far as probable effects are concerned, Germany has reduced
its duties on intra-EEC trade by 50 per cent for many items and 25 per
IV - 6
cent for some.
foreigners'
Action on the 25 per cent withholding tax on
interest from German securities has been further deferred,
along with the proposed elimination of the 2-1/2 per cent tax on new
foreign securities.
IV-C.1
U.S. AND INTERNATIONAL -ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED,
U.S. BALANCE OF PAYMENTS
ANNUAL RATES
U.S. BALANCE OF PAYMENTS-CC
U.S. EXPORTS BY AREA
BILLIONS OF DOLLARS
3 MO MOV AV
11-2-1)
MAR 60
I~
-- ICONT
7
---
W EUROPE
MAR 59
f-
6
-
5
OTHER
MAR47
j3 c,r^'
r
I
CANADA
,
NL
A'
MAR
34
MAR
19
LATIN AMERICA
MAR
UK
1959
PAPAN
1959
1963
1961
2
15
196
196
U.S. LONG-TERM PRIVATE CAP. OUTFLOWS
BILLIONS IF DOLLAR
DIRECT I
--
------
VESTMENT
1
-L-NE
ISSUES
OTIER LONG TERM, NET
,IMA ---
1959
--------------1961
I-L
I
1963
1
0/64
6/30/64
APPENDIX A:
CHANGES IN THE FEDERAL DEBT STRUCTURE
Since late 1960, the Treasury has made gradual but steady
progress in lengthening the maturity structure of the public debt.
The accomplishment of this long-standing objective stands markedly in
contrast to the results of the previous decade. During the 1950's,
the maturity structure of the debt shortened rather continuously,
except for two brief periods of recession and early recovery. Since
a shortening of the outstanding public debt tends to increase its
liquidity to holders or to increase the volume of close money substitutes, many observers saw in this shortening a building up of
inflationary pressures.
Beginning in the last quarter of 1960, the Treasury has
dramatically reversed the earlier trend. As can be seen in the last
column of the accompanying table, the average maturity of publiclyheld marketable debt rose from 54 months at the end of September 1960
to a peak of 66 months by September 1963. At the end of May of the
current year, the average was 63 months.
But this kind of summary figure is not the only, nor necessarily the best, way to view the debt structure, as it gives too much
weight to the longest-term bonds. The general impression of the nature
of debt lengthening is slightly altered if we look at the maturity
structure of the publicly-held debt by selected maturity categories
rather than by average maturity. Some of the most striking changes
in the debt structure since September 1960 have occurred at the extremes
of the maturity spectrum, including the short end. The Treasury's
debt lengthening activities during 1961, and to a smaller extent 1962,
were undertaken at the same time as securities maturing within 1-year,
especially Treasury bills, were expanded. Despite some overall reductions in under 1-year issues during 1963 and early 1964, there has been
over the entire period from September 1960 to May 1964 an expansion of
under 1-year issues of $10.5 billion, about equal to the increase in
aggregate publicly-held marketable debt at that time.
The best evidence of the Treasury's debt lengthening accomplish-
ments can be seen in terms of shifts within those maturity sectors often
characterized as "intermediate" and "long-term."
As indicated in the
table, while increases in over 10-year maturities have been very moderate,
there has been a decided rearrangement of issues between the 10-20 and
the over 20-year breakdowns.
In the past three and a half years, the
over 20-year maturities have risen by $6.1 billion, while 10-20 year
issues have declined by approximately $5.0 billion.
This same type of
rearrangement is evidenced by the shift from 1-5 into 5-10 year maturities--a shift of roughly $13.0 billion.
The Treasury's success in debt lengthening and in achieving
a better balanced maturity structure is attributable, in large measure,
A-
2
to the advance refunding technique. Total sales to the public of over
10-year bonds in all regular refundings, cash refundings, and cash
auctions combined have amounted to only $1-1/4 billion since September
1960. (Sales of 5-10 year bonds, however, have been considerably
greater.) The greatest amount of debt extension was accomplished in
the three "senior" advance refunding operations; that is, in those
advance refundings in which exchange options were offered to holders
of outstanding securities exceeding 5-years to maturity. The average
maturity of the total marketable debt was extended by roughly 15 months
in these three operations, the last one of which was in March 1962.
The "senior" operations were characterized both by large "off the market"
exchanges by such investors as life insurance companies and mutual savings
banks, and by little market activity, as indicated by relatively small
amounts of trading in "rights" and "when-issued" securities. There is
little evidence of any lasting upward adjustments in long-term interest
rates following these operations, despite their massive size.
The various "junior" advance refundings and pre-refundings
accomplished somewhat less in terms of extending the average maturity
of the debt. ("Junior" advance refundings are defined as those involving
outstanding securities with 1-5 years to maturity, while pre-refundings
involve outstanding securities with less than 1-year to maturity.) However,these operations were instrumental in the expansion of issues in
the 5-10 year maturity range. By comparison with the "senior" operations,
the various "junior" and pre-refunding operations have been characterized
by a considerably larger degree of turnover in "rights" and "when-issued"
securities. As indicated by the large amount of market activity and
ownership changes, it seems possible that the sale of long-term bonds
in the March 1963 and September 1963 operations may have absorbed a
significant volume of new cash funds. Consequently, these operations
may have exerted some upward impact on long-term interest rates in the
following weeks.
What are the implications of this review for debt management
operations in the future? First, in the absence of truly "senior" types
of advance refundings, it may not be possible to accomplish a substantial
extension in the average maturity of the marketable debt. In the combined
"junior" pre-refunding operation of January 1964, for example, the
average maturity of total marketable debt was extended by only 1.6
months.
And no progress has been made in this respect in the last 12
months, as can be seen in the table.
However, the real importance of "junior" and pre-refunding
operations is probably understated by concentrating too narrowly on a
figure for average maturity. It is quite likely, for example, that
extension of, say, $2 billion of 1-year securities into 10-year bonds
has a more pronounced effect on liquidity than the extension of $1
billion of 10-year bonds into 30-year bonds. Pre-refundings and "junior"
advance refundings are especially significant with respect to reducing
the volume of relatively short-term securities outstanding.
A-
3
Second, if market pressures push long-term interest rates
If bond yields
upward, debt lengthening will become more difficult.
press on the 4-1/4 per cent legal interest rate ceiling, the debt
structure could shorten considerably. For example, if no additional
bonds were to be sold this year, the passage of time would move roughly
$6.3 billion in publicly-held bonds out of the over 5-year maturity
range. Coupled with the necessity of new cash borrowing of around $7
billion in the second half of 1964, the public's holdings of marketable
issues under 5-years to maturity would register very substantial increases
by the end of the year.
MATURITY STRUCTURE OF PUBLICLY HELD MARKETABLE DEBT
(In billions)
Total
1-5
Years
5-10
Years
Total
10-20
Years
Over 20
Years
Average maturity Of Publicly Held
Marketable Debt
(in months)
$20.3
$80.1
$60.6
$19.5
$18.0
$11.1
$ 7.0
54
Under 1 Year
Date
1-10 Years
Over 10 Years
_
Total
Total
Bills
Other
.
$151.4
$53.3
May 1963
161.8
65.0
45.8
19.2
78.7
48.2
30.5
18.1
4.8
13.2
63
September 1963
160.5
62.3
44.0
18.3
79.3
45.4
33.8
18.9
6.1
12.8
66
May 1964
161.8
63.8
46.3
17.5
78.9
46.7
32.2
19.1
6.1
13.0
63
Change from
September 1960September 1963
+ 9.1
+ 9.0
+11.0
- 2.0
- 0.8
-15.1
+14.3
+ 0.9
- 5.0
+ 5.9
+12
Change from
September 1960May 1964
+10.4
+10.5
+13.4
- 2.9
- 1.1
-13.8
+12.7
+ 1.1
- 5.0
+ 6.1
+9
+ 0.1
- 1.3
+ 0.5
- 1.8
+ 0.3
- 1.5
+ 1.7
+ 1.1
+ 1.3
- 0.2
September 1960
$33.0
Change from
May 1963May 1964
BAPPENDIX B:
1
CORPORATE LIQUIDITY AND WORKING CAPITAL
Corporate liquidity declined less than usual in the first
quarter of 1964, and net working capital showed an unusually large
increase. Both developments reflected primarily a substantial
reduction in notes and accounts payable, as may be seen from the table.
CURRENT ASSETS AND LIABILITIES OF U. S. CORPORATIONS
(Billions of dollars)
Changes during first quarter
1964
1962
1963
Current assets--total
Cash & deposits
U. S. Govt. sec.
Notes & accts. receivable
Inventories
Other current assets
Current
Notes
Accr.
Other
liabilities--total
& accts. payable
Fed, inc. tax liab.
curr. liabilities
Net working eapital
Level
1964-1st Q.
2.7
1.9
0.6
350.6
-3.0
-3.8
-3.9
40.6
0.7
1.5
2.6
0.9
0.5
2.1
1.7
1.3
0.8
1.3
1.3
1.2
21.4
164.6
108.6
15.5
1.0
-0.1
-0.5
1.6
0.9
0.7
-0.9
1.1
-2.9
-2.9
-0.7
0.7
195.9
131.5
15.6
48.8
1.7
1.0
3.5
154.7
Figures shown in the table are derived from recently revised
SEC estimates. These series are subject to annual revision when new
Statistics of Income data become available. In this case, adjustment to
the 1961 benchmarks required only moderate revision in the estimates.
A far more important revision adjusted for previous misclassification by some corporations of their holdings of negotiable time
certificates of deposit. A recent clarification of SEC's reporting
instructions to respondents revealed that substantial amounts of CD's
had previously been included in "other current assets" and smaller
amounts in receivables and U.S. Government securities. For manufacturing
corporations the amount originally included in these other accounts
totaled roughly $2-1/2 billion in the fourth quarter of 1963. In the
revised working capital series, all corporate holdings of CD's are
included in cash and deposits, but information is not available as to
the method used to estimate the amounts that were added to cash and
subtracted from other accounts in earlier quarters.
B-
2
One result of correcting the previous misclassification of
CD's is to moderate the decline since 1961 in the ratio of cash,
deposits and U. S. Government security holdings to total current
liabilities. This conventional liquidity ratio still moves downward,
however. It was 31.6 per cent at the end of March 1964, compared
with a revised 32.4 per cent a year ago and with 34.1 per cent in
early 1962.
@FedFRASER