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Confidential (FR)

Class II FOMC

Part 2

June 11, 1975

CURRENT ECONOMIC AND
FINANCIAL CONDITIONS

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

CONFIDENTIAL (FR)

June 11, 1975

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors

of the Federal Reserve System

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Industrial production index ........................
............
Capacity utilization ......... ................ ...................
Unemployment rate ...................
...... ,....
..............
Nonfarm payroll employment ...................
..............
,....
Auto sales ..................

...

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

- 2

......
Retail sales ......................................
Conference Board survey of
consumer expectations ........................................
New orders ................
................................
Contracts for commercial and
industrial buildings .........................................
Commerce survey of plant and
equipment expenditures .......... .... ...
...................
..............
Capital appropriations ...........................
Business inventories .........................
....
...
Wage increases ..............................................
............. ....... .......
Wholesale prices......................
Consumer price index .............................................
Federal spending ..........................................

- 1
-2
- 2
- 2

.........

3
- 3
- 3
- 4
- 4
- 55.......
- 7
-

TABLES:
Selected Unemployment Rates .....................................

- 9

Changes in Nonfarm Payroll
.......-10
Employment ............................ .................
Auto Sales ...................................................... -11

Retail Sales

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

New Orders ....................................................

-12
-13

Survey Results of Anticipated
Plant and Equipment Expenditures ................
Business Inventories .............................................
New Private Housing Units ........................................
Hourly Earnings Index ..............................................
Price Behavior .....................................................

-14
15
-1
-17
-13

Federal Budget and Federal Sector
in National Income Accounts ................................... .

-19

TABLE OF CONTENTS

Continued
Page

Section

III

DOMESTIC FINANCIAL DEVELOPMENTS

Monetary aggregates .....
............................
......
Short-term credit markets ..................................
Consumer credit ..................... .
......................
Long-term securities ........................ ......... .......
Mortgage markets ............
..
..............

- 1
- 3
* 6
- 8
-11

TABLES:
Selected Security Market
Quotations ..................................................
......................
Monetary Aggregates ..................
Individual Income Tax Refunds
and Rebates ...........
...........................
.......
Commercial Bank Credit ...........................
......
Security Offerings ......................................
FNMA Auction Results-Home
Mortgage Commitments ........................

- 2
- 4
- 5
- 7
- 9
-13

Conventional Home Mortgages
at Selected S&L's ..............................

........

-13

INTERNATIOAL DEVELOPMENTS
Foreign exchange markets ....................
Euro-currency market .........................................

........... - 1
2

U.S. international capital
........... - 6
transactions ... .................................
Transactions in securities ..................................... - 6
U.S. liabilities to foreign official
agencies ,..................... ............................. . * 7
U.S. merchandise trade ......................................

- 7

Non-fuel imports .........................................

- 9

Imports of fuel ...............

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

...........

Agricultural exports ..........................................

- 9

Non-agricultural exports ............................... ....

- 9

Economic activity and prospects in
major industrial countries ..............................

..,

-11

TABLES:
Selected Euro-dollar and U.S. Money
Market Rates .................

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

- 3

Selected Euro-dollar and U.S.
Costs for Prime Borrowers ...... ,.......................
U.S. Merchandise Trade ........................

3
- 8

TABLE OF CONTENTS

Continued

Section

Page

IV
TABLES:
Industrial Production in Major
..........
........
Industrial Countries ...............
Unemployment Rates in Major
Industrial Countries ............................................
Consumer Prices in Major
....................
Industrial Countries ,....... ... ,,......

-11
-13
. -14

APPENDIX A:
The President's Mid-Session Budget Review ........................ A-1

DOMESTIC NONFINANCIAL SCENE

June 11, 1975

II -- 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)

6.2
e.71/

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)

May
May
May
May
May
May

6/6/75
6/6/75
6/6/75
6/6/75
6/6/75
6/6/75

92.9
9.2
7.0
76.4
18.1
58.4

6.81/
1.0
-.7
1.5

May
May

6/6/75
6/6/75

36.0
4.47

36.11/
5.4

36.01/
4.5

36.71/
7.2

May
Apr.

6/6/75
5/29/75

39.0
147.3

39.01/
2.4

38.81/

40.31/

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

Apr.
Apr.
Apr.
Apr.

5/21/75
5/21/75
5/21/75

5/21/75

158.7
170.9
147.5
164.1

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

May
May
May

6/5/75
6/5/75
6/5/75

172.9
169.4
182.1

Personal income ($ billion) 3 /

Apr.

5/15/75

1202.4

8.8

8.91/

5.91 7

-1.4
-4.5
-. 4

2.4

8.21/
3.31
-2.4
-10.2
.3

9.2

14.2

5.7
-2.3
8.3
6.9

10.2
8.0
11.0
11.0

4.2
2.1
7.3

5.4
1.4
12.7

11.7
13.2
8.3

6.7

3.8

6.9

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

Apr.
Apr.
Apr.
Apr.

6/2/75
6/2/75
6/2/75
6/2/75

38.9
12.0
10.4
1.7

9.7
7.2
9.0
-2.7

Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade

Mar.
Apr.
Mar.

6/6/75
6/2/75
6/6/75

1.70
1.87
1.44

1.661/
1.961/
1.421/

Apr.

6/2/75

.843

.8321/

Retail sales, total ($ bil.)
GAF

May
May

6/10/75
6/10/75

48.0
12.3

2.2
2.5

Auto sales, total
Domestic models
Foreign models

May
May
May

6/5/75
6/5/75
6/5/75

7.7
6.2
1.5

5.3
8.7
-7.2

1975
1975

6/5/75
6/5/75

114.24

Ratio:

Mfrs.' durable goods inventories to unfilled orders

(mil. units)!/

Plant & equipment expen. <$ bil.) 4 /
All industries
Manufacturing
3

Housing starts, private (thous.) /
Apr.
Leadina indicators (1967=100)
Apr.
yajse.
/Ntsaoi
1/ Acuadaa
I/ Actual data. 21 Not seasonally adjusted.

8.0
2.8
3.1
1.3

-11..8
-10.5
-13.0
8.4

1.681

1.461

1.491/

16.31/

1.481/

1.321/

.786

-16.0
-13.4
-25.4

.71,41/

-16.0
-21.6
19.5

48.47

5/18/75
990
5/30/75
125.9
3 tanulrt.
3/ At annual rate.

-.9

4
4/

-37.3

-15.9
5.7
lne-omreNysre
Planned-Commerce May survey

II - 1

DOMESTIC NONFINANCIAL DEVELOPMENTS
Incoming data for May point to an impending upturn in economic
activity.

Industrial production held at about the April level, and

nonfarm payroll employment showed the second successive monthly increase.
There was a broadly-based pick-up in consumer spending, including
some recovery in automotive purchases.

Moreover, new orders for

durables and building permits for housing rose sharply in April.

the inflation front, price movements have continued in line with the
overall moderation evidenced since late last year.

However, there are still questions about the near term vigor
of the expected recovery.

Automotive sales, despite the modest recent

improvement, are still at a very low level and a new survey showed
further downward revisions in capital spending plans.

And, while

business inventories declined sharply again in April, the liquidation
of durable goods at the producer level still has some way to go.
The industrial production index is estimated to have been
essentially unchanged in May, following progressively smaller declines
in the previous two months.

Further increases were recorded in the

production of most nonautomotive categories of consumer goods and auto
assemblies rose 5 per cent to an annual rate of 6.6 million units.
Despite a small increase in dealer stocks in recent months, a further
rise in auto production is scheduled for June and July.

The May rise

in consumer goods output was about offset by declines in the production
of business equipment and metals.

In the materials grouping, further

increase occurred in nondurables while output of durables continued to
drop; raw steel production was reduced 10 per cent further in May.

II - 2

As a result, capacity utilization of major materials may have declined
only a bit further in May.
Nonagricultural employment (household survey) was about
unchanged in May, but with farm employment up sharply, total employment
rose by 320,000--the second successive month of increase.

However,

there was a large increase of close to 700,000 in the labor force-mainly adult men and teenagers--and the unemployment rate rose .3 percentage point to 9.2 per cent.

Job loss again accounted for a large

portion of the rise in unemployment, but new entrants and reentrants
also swelled the jobless total.
The increase of about 60,000 in nonfarm payroll employment
reflected the emerging pattern of adjustment in overall activity.
Increases in employment from April to May occurred in 54 per cent of
all industries compared with 42 per cent in the prior month and 17
per cent at the low in February.

Employment rose in nondurable

manufacturing, where the inventory correction is apparently nearing
completion.

In addition, there were continued gains in retail trade,

service, and government employment.

However, employment did

continue to fall in the durable goods sector of manufacturing where a
large portion of the inventory adjustment is yet to be

accomplished,

and on balance, factory employment was about unchanged in May.

The

factory workweek remained at the April level which had shown an upturn
from the March low.
Although auto sales did pick up in May for both large and
small cars, the 6.2 million unit annual rate for new domestic-type
models was only a bit above the December pre-rebate level.

Data for

10 days selling periods have shown three consecutive periods of improve-

- 3

ment and by the last third of May the sales rate had risen to a 6.4
million unit rate.

Sales of foreign cars were at a 1.5 million unit

rate in May, slightly below April but a fifth above a year earlier.
The import share edged below 20 per cent of the domestic market.
Retail sales, exclusive of autos and nonconsumer items,
rose by 1.8 per cent in May, an acceleration of the gains evident
since the beginning of the year.

Increases were widespread, with

particular strength evident in general merchandise.

The recent surge

in retail sales in probably attributable to the income tax rebates,
which were mailed out beginning May 9, as well as the reduction in
income tax withholdings.
The Conference Board survey of consumer expectations--taken
in late March and early April--showed a marked increase in consumer
optimism in regard to future
well as income flows.

business and employment conditions as

Buying plans picked up for automobiles and homes

but the improvement was concentrated in the purchases of used cars and
existing residential units, perhaps indicating a resistance to the
higher price levels of new items in these markets.
Reflecting in part increased consumer demand, new orders
received by manufacturers showed a strong surge in April following the
sharp erosion since last fall.

Total new orders for durable goods

rose 9.7 per cent in April, while those for nondefense capital goods
rose by 9 per cent.

Advances were farily widespread with orders

received by iron and steel, electrical machinery, and motor vehicles
showing the greatest strength.

II - 4
Although this is the second increase in the past three months
for durable goods new orders, in constant dollars this series remains
close to 30 per cent below last summer's peak.

New orders have dropped

so sharply over the past half year that some recovery is required merely
to maintain the current low level of business shipments.

Since the level

of shipments is still above the ordering rate, backlogs of unfilled
orders--which have dropped continuously since last fall--fell further in
April.

Unfilled orders typically fall for about a quarter after the

trough in aggregate activity.
Contracts for commercial and industrial buildings (measured
in square footage of floor space) advanced by 43 per cent in April
following two months of very sharp decline.
in

the commercial category.

Most of the increase was

Although total contracts are now back

to about last November's level, they are still 40 per cent below the
peak July 1973 level.
Orders and contracts are usually volatile around turning
points and a single month's change may not be representative of changes
in business

demand.

Evidence of continued caution in fixed investment

plans was apparent in the results of recent plant and equipment surveys.
The quarterly Commerce survey of plant and equipment expenditures--taken
in late April and May--indicates a further erosion of plans for the

second half of the year.

Current dollar outlays for all industries are

now scheduled to drop a bit further in the second quarter, to begin

II - 5

rising fractionally in the third quarter, and by the final quarter of the
year to show an increase at only a 5.4 per cent annual rate.

The survey

reports that businesses plan a 1.6 per cent increase in capital outlays
for 1975 as a whole, compared to an anticipated gain of 3.3 per cent
in the previous survey.

Plans of manufacturers weakened more from the

prior survey than did those outside of manufacturing.

Among manufacturers,

strength is found only in the materials producing industries, whereas
in nonmanufacturing the major sources of support are in transportation,
mining, and gas utilities.

Consistent with the weakening in manufacturing,

the Conference Board reports that newly approved capital appropriations of
large manufacturing companies fell by 9.4 per cent in the first quarter,
following a 26 percent drop in the fourth quarter.
The liquidation of business inventories that began the first
quarter continued in April, with the book value of manufacturers' stocks
down by $13.8 billion and wholesale stocks off at a $6 billion rate--in
both cases more than in March.

Nearly all of the liquidation in

manufacturing was in nondurable goods, and large stock adjustments still
seem likely in the durable goods sector.

At wholesale, however,

durable goods stocks were reduced sharply in both March and April.
Despite continued signs of an impending recovery in residential
construction, housing starts remained below a 1 million unit annual rate
in April.

However, residential building permits increased substantially

II - 6
after having fluctuated around historically low levels in the early months
of 1975.

Moreover, with builders' backlogs of uncompleted dwelling units

reduced and savings flows to major lenders continuing very strong, increases
in housing starts are still expected soon.
Wage increases continue at a moderate pace.

The average hourly

earnings index for private nonfarm workers rose 0.6 per cent in May after
remaining unchanged in April.

The rate of change in this index since

year-end has been 7.1 per cent at an annual rate, as compared to an 8.7
per cent annual rate of rise over the second half of 1974.

May increases

in wages were particularly sharp in mining, transportation, and trade.
Wholesale prices rose 0.4 per cent, seasonally adjusted, in
May.

The rise in industrial commodities of 0.2 per cent was in line

with the increases of the previous two months.

Over the past 6 months

these prices have risen at an average monthly rate of under 0.3 per cent,
as compared to nearly 2 per cent over the preceding half year.

In May,

increases in the prices of lumber, plywood, millwood, and fuels were

partially offset by lower prices for some chemicals and metals.

Compared

with recent months, producer finished goods rose at a substantially
reduced rate, but the rate of advance for consumer nonfood finished goods
rose somewhat.
Prices of farm and food products in May rose 0.6 per cent,
much less than the big surge in April.

The advance in the past month

was due mainly to still higher prices of livestock and meats but there
were also significant advances for eggs and cotton.

II - 7

In April, the consumer price index rose at a seasonally adjusted
annual rate of about 7 per cent.

This was greater than in March, in large

part because of the reversal in food prices.

The inflation at retail

so far this year--somewhat over 6 per cent--is about half that recorded
in 1974.
The staff continues to expect Federal spending of $322 billion
on a unified budget basis in the fiscal year ending this June.
current staff estimate of receipts is $281 billion.

The

It now appears

that most of the one-time disbursements associated with the Tax Reduction
Act of 1975 will be made before the end of this fiscal year.

Rebate

payments on 1974 tax liabilities are expected to be entirely completed
by mid June.

The timing of the $50 cash payment to social security

beneficiaries is more uncertain, but checks are ready for mailing as
soon as Congress appropriates the funds.
For FY 1976, the staff now expects unified budget outlays to
total $367 billion.

This is well above the Administration's estimate as

forecast in the Mid Session Review 1

but is equal to the target outlays

contained in the Congressional budget resolution.

Nevertheless, there

are a number of differences between the staff's estimate and the
Congressional Budget Committees' final recommendation.

A number of

programs, currently pending in Congress and included in the House-Senate
budget forecast--such as emergency housing assistance and public works

1/ A reconciliation is presented in Appendix A.

II - 8

grants for states and localities--face the possibility of a Presidential
veto.

Given the uncertainty surrounding any veto override, the staff

has excluded these programs from the latest Greenbook forecast.
the other hand,

the staff is

expecting higher levels of defense spending

and unemployment compensation.
For FY 1976, the staff has increased the revenue forecast by
$10 billion to about $299 billion.

The increase in

the oil import fee

to $2 per barrel, reestimates a personal income tax elasticities, and
higher income assumptions are responsible for most of this rise.

Given

these revenue and outlay forecasts, the staff is currently expecting
the FY '76 deficit to be close to $68 billion.

The high employment

budget (NIA basis) continues to show a shift from a CY '74 surplus of
approximately $19 billion to deficits of $10 billion and $4 billion in

CY '75 and '76.

SELECTED UNEMPLOYMENT RATES
(Seasonally Adjusted)

1974
May
Total
Men 20 years and over
Women 20 years and over
Teenagers

1975
November

April

May

5.2
3.4
5.1
15.6

6.6
4.6
6.6
17.4

8.9
7.0
8.6
20.4

9.2
7.3
8.6
21.8

Household heads

3.0

3.9

6.0

6.3

White
Negro and other races

4.7
9.3

5.9
11.6

8.1
14.6

8.5
14.7

White collar workers
Blue collar workers

3.2
5.8

3.8
8.3

4.7
13.0

5.4
13.0

State insured*

3.3

4.3

6.8

7.0

per cent of covered workers

CHANGES IN NONFARM PAYROLL EMPLOYMENT
(IN THOUSANDS)

Average Monthly Change
Nov. 1974May 1975

Employment
May 1975

May 1974May 1975

Total Nonfarm

76,443

-160

-327

+62

Goods-producing

22,230

-221

-326

-43

Construction

3,435

-53

-71

-35

18,090

-172

-257

-11

10,513

-116

-183

-52

7,577

-56

-74

+41

54,213

+62

-1

+105

Trade

16,850

-12

-33

+32

Services

13,788

+30

+11

+30

Government

14,916

+61

+58

+59

12,184

+59

+60

+56

Manufacturing
Durable
Nondurable
Service-producing

State & local government

Apr. 1975May 1975

II - 11

Table 3

AUTO SALES
(Seasonally adjusted annual rates)

Total

Domestic
Large

Small

Imports

1974:QI
QII
QIII
QIV

9.0
9.2
10.1
7.4

7.5
7.9
8.5
6.1

4.8
5.4
5.5
3.9

2.7
2.5
3.0
2.2

1.6
1.3
1.6
1.3

Oct.
Nov.
Dec.

8.0
7.0
7.2

6.4
5.7
6.1

3.9
3.7
4.0

2.5
2.0
2.1

1.6
1.3
1.1

8.3

6.6

3.6

3.0

1.7

8.1
9.2
7.7
7.3
7.7

6.6
7.2
6.0
5.7
6.2

3.7
3.6
3.6
3.8
4.1

2.9
3.6
2.4
1.9
2.1

1.5
2.0
1.6
1.6
1.5

1975:QI
Jan.
Feb.
Mar.
Apr.
May

II - 12
Table 4
RETAIL SALES
(Seasonally adjusted, percentage change from previous period)

1974
QIV
Total sales
Durable
Auto
Furniture and
appliance
Nondurable
Food
General
merchandise
Gasoline
Total, less auto and
nonconsumption items
GAF

1975
Q1

May 75
75 QI

Mar.

Apr.

May

2.7

2.8

-1.9

1.2

2.2

5.3

2.6

2.7

3.0

-8.3
-11.9

4.7

7.2

5.7

3.5

-7.0

-.7

3.5

-.2

3.7

-.1

.4
1.6

1.6
2.9

2.9
-.5

1.0
1.5

-.2

-2.7

2.0
1.3

-1.5
-1.3

.3
1.2

5.8
4.0

.9
.9

1.3

3.1
2.0

1.6

2.7

-. 1

1.8

2.5

-3.2
-10.9
-15.5

-. 1
-3.1

5.2

Real*
-6.2
.9
n.a.
-2.0
*Deflated by all commodities CPI, seasonally adjusted.

n.a.

II - 13

Table 5
New Orders
(Per cent change from prior month)

Total Durable
Goods
1974:July
Aug.
Sept.
Oct.
Nov.
Dec.
1975:Jan.
Feb.
Mar.
Apr. (p)

Nondefense Capital
Goods

1.8
3.7
-6.2
-2.8
-4.2
-12.4

6.6
-7.8
.2
-3.8
-6.7
-1.5

-4.7
2.7
-4.1
9.7

-3.7
-1.1
-4.5
9.0

II - 14
Table 6

SURVEY RESULTS OF ANTICIPATED PLANT
AND EQUIPMENT EXPENDITURES
(Per cent change from prior year)

1975
1974

McGrawHill Apr.
Survey

12.7

5.5

4.6

3.3

1.6

Manufacturing

21.0

8.5

9.0

7.1

5.4

Durables
Nondurables

17.5
24.7

1.9
14.9

1.8
16.0

.0
14.1

-2.4
12.9

Materials producers
Other producers

34.6
9.5

21.8
-5.3

19.5
-1.7

17.3
-3.5

16.6
6.4

7.6

3.4

1.6

-. 9

Railroads
Air & other transportation

29.5
1.2

31.9
12.4

27.7
3.0

13.6
11.2

Electric utilities
Gas utilities

10.6
5.8

.0
16.1

1.2
21.9 2/

-. 7
4.1

-1.9
6.5

Communications
Commercial
& other

8.6
3.0

-4.0
1.0

2/
-1.8
-4.3 2/
2/

-2.8
-3.5

-4.3
-5.4

All industry

Nonmanufacturing 1/

1/ Contains industries not shown separately
1/
2/

Confidential

Commerce
Dec.
Survey

Commerce
Feb.
Survey

Commerce
May
Survey

11.9
9.0

II - 15
Table 7
BUSINESS INVENTORIES
(Change in annual rates in seasonally
adjusted book values, $ billions)

1974

1975

QIII

QIV

March

April

n.a.

59.2

52.9

-11.4

-22.4

Manufacturing

37.7

29.7

3.2

-9.6

-13.8

Durable
Nondurable

23.3
14.5

19.1
10.6

7.6
-4.5

-2.4
-7.2

-1.3
-12.6

Trade, total

21.4

23.2

-14.5

-12.8

n.a.

Wholesale
Retail
Auto

8.6
12.8
4.0

8.3
14.9
11.8

-4.1
-10.4
-8.5

-5.1
-7.7
-2.2

-6.0
n.a.
n.a.

Manufacturing and trade

INVENTORY RATIOS
1974

1975
March

April

March

April

Inventory to sales:
Manufacturing and trade
Manufacturing, total
Durable
Nondurable

1.46
1.62
2.04
1.16

1.46
1.62
2.04
1.17

1.70
1.96
2.58
1.34

n.a.
1.87
2.46
1.27

Trade, total
Wholesale
Retail

1.32
1.09
1.51

1.31
1.08
1.50

1.44
1.28
1.57

n.a.
1.28
n.a.

Inventories to unfilled orders
.722
Durable manufacturing

.714

.832

.843

II - 16
Table 8

NEW PRIVATE HOUSING UNITS
(Seasonally adjusted annual rates, in millions of units)

1/
1970-

1974

Per cent change in
April from:

1975

Month ago

Year ago

.90

+27

-31

.97

.99

+ 2

-37

.74
.25

.76
.22

.75
.24

-.4
+ 9

-23
-61

Mar. (r) Apr. (p)

QIV

Permits

1.10

.78

.70

.71

Starts

1.24

1.00

.99

.76
.24

1-family
2- or more-family

.69
.55

2/
Under construction-

.89

1.23

1.12

n.a.

3/
- 4-

3/
-29-

1.39

1.63

1.37

1.25

n.a.

3/
- 6-3

-31

.37

.23

.19

- 3

-55

Completions
MEMO:
Mobile home shipments

1/
2/
3/

Previous cyclical trough.
Seasonally adjusted, end of period.
Per cent changes based on March.

.20

HOURLY EARNINGS INDEX*
(Seasonally adjusted; per cent change, annual rates)

May
1914 ~
__
---.
May 1974May 1975

.
Nov. 1974May 1975

195

Apr

Apr. 1975May 1975

8.8

7.2

7.8

10.1

8.0

7.4

Construction

8.4

6.7

7.0

Trade

8.2

6.9

8.5

Services

6.9

7.1

6.9

Total private nonfarm
Manufacturing

*Excludes the effects of fluctuations in overtime premium in manufacturing
and shifts of workers between industries.

II - 18

Table 10
PRICE BEHAVIOR
(Percentage changes, seasonally adjusted annual rates)1/
Relative
importance
Dec. 1974

Dec. 1973
to
Dec. 1974

Dec. 1974
to
Mar. 1975

Mar.
to
Apr. 1975

Apr.
to
May 1975

WHOLESALE PRICES
100.0

20.9

-6.3

18.5

4.2

Farm and food products

29.1

11.0

-27.6

57.7

7.3

Industrial commodities2/
Materials, crude and
intermediate

70.9

25.6

4.2

1.1

2.1

46.0

28.2

2.7

3.4

0.0

17.5
8.6

20.5
22.6

3.8
11.8

2.4
7.5

4.0
3.7

13.4

13.0

-12.9

31.7

21.2

Relative
importance
Dec. 1974

Dec. 1973
to
Dec. 1974

All commodities

Finished goods:
Consumer nonfood
Producer
Consumer foods

Dec. 1974
to
Mar. 1975

Mar.
to
Apr. 1975

CONSUMER PRICES
100.0

12.2

6.0

7.1

Food
Commodities (nonfood)
Services

24.8
39.0
36.2

12.2
13.2
11.3

-0.2
7.4
8.2

4.2
9.0
6.6

Addendum
All items less food
and energy3/4/
Petroleum products3/
Gas and electricity

68.3
4.4
2.6

11.3
22.8
19.6

9.4
-0.5
17.7

6.3
10.5
16.2

All items

1/ Not compounded for one-month changes.
2/ Stage of processing components do not add to the total because they include some items
found in farm and food products group.
3/ Confidential--not for publication.
4/ Energy items excluded: gasoline and motor oil, fuel oil and coal, and gas and electricity.

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

Fiscal 1975 e
Adm. Est.
F.R.
5/30/75
Board

Fiscal 1976 e /
Adm. Est.
F.R.
Board
5/30/75

Calendar Years
1974
1975
Actual
F.R.B.'

SF.R.B. Staff Estimates
Calendar Quarters
Half-Year
1975
1976
I
III
IV
Jan.-June
I*
Unadjusted data

Federal Budget
-42.6
281,0
323.6

Surplus/deficit
Receipts
Outlays
Means of finahcing:
Net borrowing from the public
DeCrease in cash operating balance
Off-budget deficit (-) 1/
Other 3/
Cash operating balance, end of period
Memv:

Sponsored Federal agencies

1/
2/
e f -

6,484
40

5,633
-78

8,100

1,300

8,000

-1,610

766

601

Includes issues of foreign private and official institutions.
Total Treasury issues, including Federal Financing Bank.
Estimated
Forecasted.

III

Treasury to rely

- 10

solely on add-ons to bill

auctions.

Others,

including

the Board's staff, foresee a possible need for issuance of coupon
securities in addition to the extra bills, perhaps in the neighborhood
of $1 to $3 billion.
Public attention has been focused on the municipal bond market
during the past few weeks, owing to New York City's problems.

Unable to

sell debt in an unreceptive market, the City was bailed out of its cash
flow crunches in April and May by State advances on welfare payments.
Most recently, the City administration presented a "crisis" budget-one implying about a 20 per cent cut in the municipal work force--and
the State legislature passed a bill creating the Municipal Assistance
Corporation which will buy about $3 billion of the City's outstanding
short-term debt and issue its own long-term debt.

This Corporation,

backed by taxes that ordinarily would go to the City, seems to have
alleviated,
exchange

at least temporarily, the City's cash

for this aid,

flow problems.

the charter of the Municipal Assistance Corporation

requires that the city put its

financial house in order over the longer

term by instituting a number of reforms, including a limit on its
short-term borrowing, phasing in a better accounting system, and
elimination of current expense items from its capital budget.
New York City's financial difficulties had been reflected
not only in a breakdown of both the primary and secondary markets for
its obligations, but in the yields on debt obligations of other State
and local units as well.

This was most apparent in the market for

securities associated with New York State, where rates on new issues
in May were exceptionally high.

Outside New York State, some recent

III - 11

offerings have received a single bid rather than the several usually
received in the past.

Underwriting syndicates, by allocating new issues

among a larger number of firms, were diffusing the risk of individual
offerings and assuring increased breadth of marketing.

However,

immediately following news of an apparent resolution of New York City's
financial difficulties, the tone of the municipal market improved.
Mortgage Markets.

New and outstanding mortgage commitments

at S&L's rose substantially further in April, the latest month for
which data are available.

With record May deposit inflows at the non-

bank thrift institutions, further significant gains in commitments
seem likely, and recent yield developments suggest this.

Furthermore,

field reports indicate that commitments by S&L's and other lenders
for short-term, high-yield construction loans, while still being issued
on a very selective basis, have been increasing in volume in some parts
of the country.
Mortgage rates began to ease again in May as the stabilization
of money and bond market yields alleviated, to some extent, lender
apprehension over possible near-term disintermediation and further
diversion of funds by diversified lenders.

Still, some concern about

disintermediation remains, owing in part to the large contribution
of potentially volatile passbook savings to the recent growth of time
and savings deposits at both banks and thrift institutions.
Despite the continued limited participation by diversified

lenders in the primary mortgage market (partly because of the large
spread of corporate bond rates over mortgage rates), average rates on

III - 12

new mortgage loan commitments at S&L's have declined 3 basis points
since mid-May.

In the secondary market, average yields in the FNMA

auctions also have eased.

Demand for FNMA's commitments declined

further as fears of falling mortgage prices lessened and as GNMAguaranteed mortgage-backed securities once again became an attractive
marketing alternative to FNMA for originators of FHA/VA loans.

III - 13
FNMA AUCTION RESULTS-HOME MORTGAGE COMMITMENTS
Government-underwritten
Amount
(In $ millions)
Accepted
Offered

of auction

Conventional
Amount
(In $ millions)
Offered
Accepted

Average
yield

1974--High
Low
1975--High
Low

1,155
26
552
25

1975--Apr.

551.6
470.9

277.2
247.3

8.98
9.13

99.8
79.2

44.6
51.3

9.13
9.26

5
19

525.5
165.6

280.4
115.0

9.29
9.25

69.8
46.4

43.9
38.4

9.43
9.41

172.5

80.4

9.14

51.2

27.1

9.26

May

June
NOTE:

(3/25) 333 (3/25)
(11/18) 18 (11/18)
321 (3/24)
(4/7)
(2/10)
18 (2/10)

10.59
8.43
9.37
8.78

(4/8)
(10/21)
(4/7)
(1/27)

(9/9)
(2/25)
(1/13)
(3/10)

63
7
51
9

Average
yield

10.71 (9/9)
(4/8)
(11/18) 8.47 (3/11)
9.50 (1/13)
(4/21)
8.96 (3/10)
(2/10
2/24)

Average secondary market yields are gross before deduction of fee of 38 basis
points paid for mortgage servicing. They reflect the average accepted bid yields
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.
CONVENTIONAL HOME MORTGAGES AT SELECTED S&L's
Average
going rate on
80% loans
(per cent)

10.03 (9/27, 10/18)
8.40 (3/15, 3/22)

1974--High
Low

1975--Jan.
Feb.
Mar.
April
May

Rate
spread 1/
(basis

Basis point
change from
month or week
earlier

---

points)
97 (11/15)

-106

9.29
9.02
8.85
8.83
8.90

29
8
-75
-83
-71
-61
-68
-71

May

16
23
30

8.93
8.93
8.90

June

8.90

(7/12)

Federal Home Loan
Bank districts
with funds in
short supply
12 (May, July-Nov.)
0 (Feb.-Mar.)

-65

Average mortgage return, before deducting servicing costs, minus average yield on
new issues of Aaa utility bonds paying interest semi-annually and with 5-year call
protection.

INTERNATIONAL DEVELOPMENTS

CONFIDENTIAL (FR)
IV -- T - 1

6/11/75

U.S. International Transactions
(in millions of dollars; seasonally adjusted)
-

Goods and services, net 1/
Trade balance
Exports
Imports
Net service transactions

3,281

-248

-5,791 -2,475
97,081 24,731
102,872 27,206
9,072 2,227

Remittances and pensions
Gov't grants and capital, net
Bank-reported private capital, net change

Claims on foreigners (inc. -)
Liquid
Other
Liabilities to foreigners (inc. +)

Liquid liabilities to:
Commercial banks abroad
(of which liab. to branches)2/
Other private foreigners
Int'l & regional organizations
Long-term liabilities
Private transactions in securities, net
U.S. purchases (-) of foreign securities
(of which:

Year

1974
0-3

New bond issues)

Foreign purchases (+) of U.S. securities
Stocks
Bonds
U.S. direct investment abroad, (inc. -)
Foreien direct investment in U.S
(inc. +)
Nonbank-reported: liquid claims, (inc. -)
: other claims, (inc. -)
: liabilities, (inc. +)
Changes in liab. to foreign official agencies
OPEC countries (inc. +) 2/3/
Other countries (inc. +)
Changes in U.S. reserve assets (inc. -)
Gold
Special drawing rights
Reserve position in the IMF
Convertible currencies
Errors and omissions

-1,775

-456

-4,398

-769

-2.385

.,,,;,

197/2I/

Q-1

Q-4

Mar.*

Apr.*

1,329
8,717
7,388

181
8,388
8,207

912

-1,472 1.340
26,217 26,822
27,689 25,482
2,384
-463_

-1,568

1.994

482 -4,848 -2.142

282

-19.152 -1,996
-5,800
-431

-4,304 -3,687-2,250
-1,740 -4,668:-2,197

-769

-13,352 -1,565

-2,564

981

16,767

3,990

4,786,-1,161

16,728
12,588
(2,349)
2,852
1,288
39

4,010
2,896
(-503
893
221
-20

4,899 -1,082
2,868 -2,160
(21 7(-1,00
731
230
1,300
848
-113
-79

-1,346
-1,951
(-2,336)
605
447
158

-138
-306
(-416)
168
82
86

-6,801 -2.047
2,308
-89
-19
564
-2.946
-324
1,047.
354

-53
108

97
204
(-135
-37
-70
11

-1,355 -1.557
-365
-686 -2,034
-474
(-77(-2,129) (-549
-669
477,
109
-23
958
235
-481
-126
-646

1.323

4.394'

2,656
1,738

3.131
236
2,262

-737
1,253

-1,434 -1.003

137

-326

-174

N.S.A.
O/S bal. excluding OPEC, S.A.

107
-142
67
-162
(-246)
229
260
-31

-1721
-1,265
3

-123
-726
-152

-20
-84
241

4,707

839

1,109

-650o

-5
-307
-14

-5
-152
-17

Memo:

Official settlements balance, S.A.

1,193

-2,600
-561
-283
-232
28_

9,947 3,934
-186 -2,611

9.761

1,051

-320

-4,531 -2,805

-8,327 -1,609
3,614

-4,105 -2,167
-1,875 -2,569

-342

N.S.A.
1620 2,325 -1,449 -1,931 -1,079_
* Not seasonally adjusted (except for merchandise trade data).
I/ Differs from "net exports" in the GNP account by the amount of special military
shipments to Israel (excluded from CNP net exports).
2/ Not seasonally adjusted.
3/ Partly estimated.

18
--

-8
14
12

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.
in the past few weeks.
on the light side.

Exchange markets have been very quiet

Rates have not varied much, and volume has been

On a weighted average basis against 10 leading foreign

currencies the dollar has declined by less than 1/2 per cent since the
last Greenbook.

It has moved within a range of no more than two per cent

around its present level for the past three months.
Intervention purchases of dollars by major foreign central banks
totaled around $3/4 billion, net, over the past four weeks, tending to
provide support for the dollar.

The System, meanwhile, has both purchased

and sold foreign currencies in the market with a small net balance of purchases.

The central banks of Canada and Switzerland have been the largest
net purchasers of dollars, around $200 million each. The Canadian dollar
rebounded, after having fallen sharply in previous weeks, as bond market
conditions in New York turned more favorable in May, and several Canadian
issues previously postponed were marketed.

A substantial part of the

Swiss intervention was simply an offset to the sale of dollars by the
BHS under its capital export conversion regulations (whereby foreign issuers
of franc loans and bonds in Switzerland are obliged to convert the francs
into dollars with the BNS) and did not result from any major new upward
pressure on the franc's exchange value.
The Bank of France and the Bank of England each purchased around
$100 million, with the British purchases coming after the favorable vote
on the EC referendum, which sparked some demand for sterling.

IV - 2

The Bundesbank sold some $80 million, while other major foreign
central banks either purchased small amounts of dollars or did not intervene
at all in the period.
The System made net repayments of $30 million equivalent on
swap drawings, using small net market purchases during the period, existing
balances, and $53 million equivalent of marks purchased directly from
the Bank of Norway (proceeds of a Norwegian Government bond issue denominated in marks).
In the gold market, after a brief flareup when the price went
as high as $175, the price eased back, then dropped sharply to $162 when
the Treasury on May 30 announced further gold sales.

The price subsequently

recovered to around the mid-$160's.

Euro-currency market.

Euro-dollar deposit rates have declined

in most maturities in the past month.

The 3-month rate was 5-3/4 per cent

on June 11, compared with 6-1/2 per cent in the week of May 14, and the
excess over the U.S. 60-89 day CD rate has been reduced by a comparable
amount.

The overnight Euro-dollar rate, however, has moved up slightly

to a 5.37 per cent average in the week of June 11, also rising relative
to the Federal funds rate.
U.S. banks' gross liabilities to their foreign branches rose
from an average of $2.7 billion in the week of May 7 to $3.1 billion in
the week of June 4.

IV - 3

SELECTED EURO-DOLLAR AND U.S.

MONEY MARKET RATES
(4)
3-month
Euro-$

(5)

(6)

Federal

(3)
Differential

60-89 day

Differential

Funds

(1)-(2)(*)

Deposit

CD rate

(4)-(5)(*)

6.02

6.24

-0.22 (0.30)

7.26

6.10

1.16 (1.40)

5.77
5.35
5.20

5.54
5.49
5.22

0.23 (0.73)
-0.14 (0.17)
-0.02 (0,20)

6.85
7.04
7.30

5.86
5.85
5.41

0.99 (1.22)
1.19 (1.22)
1.89 (1.85)

Apr. 30
7
May
14
21

5.23
5.22
5,22
5.13

5;71
5;42
5.20
5.13

-0.48(-0.26)
-0.20 (0.02)
0.02 (0.24)
0.00 (0.21)

6.93
6.69
6.50
5.99

5.88
5.63
5.50
5.25

1.05
1.06
1.00
0.74

5.04

5.14

-0.10 (0.11)

5.98

5.25

0.73 (0.64)

4 5.49
11E/ 5.37

5.24
5,15

0.25 (0.48)
0.22 (0,44)

6.01
5.73

5.25
5.25

0.76 (0.68)
0.48 (0.38)

Average for
month or
week ending

(1)
Overnight

Wednesday

Euro-$

1975-Feb.
Mar.
Apr.
May

June

(2)

(0.96)
(0.98)
<0.92)
(0.65)

*/ Differentials in parentheses are adjusted for the cost of required reserves.

p/ Preliminary.
SELECTED EURO-DOLLAR AND U.S. COSTS FOR PRIME BORROWERS
(1975; Friday dates)

1) 3-mo. Euro-$ loan2) 90-119 day com'l, paper3) U.S. bank loan:
a) predominant prime rate

b) with 15% comp.
c) with 20% comp.
Differentials:
(1)
(1)
(1)
(1)

- (2)
- (3a)
- (3b)
- (3c)

bal's. c/
bal's. C/

June 6

June 1lO

May 9

May 23

7.69
6,13

7.13

6.44

5,76

5.63

7,06
5.75

7.25
8.53
9.06

7.25

7.00

8.53
9.06

8.24

0.81
-0.81
-2.09

1,31
0.06
-1.18
-1.69

7 50
8.82

9.38
1.56
0,19
-1.13

-1.69

1-1/8 per cent over deposit bid rate.
offer rate plus 1/8 per cent.
prime rate adjusted for compensating balances.
Tuesday.

1.37
-0.12
-1.40
-1.93

-2.62

8.75

IV -4
There has been little change in the past month in the cost of
Euro-dollar loans relative to the costs of U.S. commercial paper borrowing
and U.S. bank loans, on which the prime rate has dropped 1/2 per cent
at the majority of banks.
Euro-currency deposits of OPEC countries are estimated by the
Bank of England to have increased by $4.3 billion in the first quarter.
This was less than the estimated $5.9 billion rise in the fourth quarter
of last year, but probably was a somewhat larger percentage of the total
OPEC investible surplus than in the previous quarter.
According to World Bank estimates, $1,625 million of medium-term
Euro-currency credits were completed in April, almost double the monthly
average of $855 million in the first quarter.

Developing countries and

Soviet Bloc countries accounted for nearly all the increase.

Four oil-

exporting countries -- Indonesia, Ecuador, Algeria, and Dubai -- completed
$260 million of credits in April and were negotiating for additional credits
totalling $450 million.

Indonesia borrowed $200 million for a nickel mining

project and was arranging a $300 million loan to refinance short-term
Petrofina borrowings.

In May, total loan completions continued to run

well above the first-quarter level.
In the Euro-bond market, new issue volume in April was the highest
of any month on record, amounting to $963 million according to Morgan
Guaranty Trust Co. compilations.

Yields rose sharply in April -- in part

because of higher U.S. bond yields --

off in May to $400 million.

and new issues appear to have dropped

Maturities on new issues have remained short,

IV-5

generally 5 to 10 years.

After an absence of U.S. borrowers for more

than a year, several U.S.

companies have begun or completed arrangements

for Euro-bond issues in recent weeks.
Alusuisse,

In early June a Swiss company,

issued the first SDR-denominated Euro-bond, on which interest

and redemptions will be paid in U.S. dollars at the going rate for the

SDR.

U.S. International Capital Transactions
Bank-reported private capital transactions in April showed
a net inflow of $.3 billion following two months of substantial outflows.
Bank lending to foreigners rose by $.8 billion, a considerably smaller
Most of the April increase

increase than in either February or March.

was in short-term claims for banks' own account; only a small amount was
for the accounts of their domestic customers.
Bank-reported liabilities to private foreigners increased by
$1.1 billion in April; this increase largely offset the reduction in the
first quarter.

Preliminary information indicates that only a small part

of the increase was to banks' foreign branches dispite the reduction in
Liabilities to branches

reserve requirements on Euro-$ borrowings.

increased by $.3 billion in April after declining by $.2 billion in
March.

Most of the April increase in total bank-reported liabilities

appears to have been to other foreign banks.

In May, there was a

reduction in bank liabilities early in the month as U.S. rates started
to decline faster than foreign rates, and there was renewed borrowing
later on as U.S. rates were fairly stable and foreign rates began to
fall faster.

For the month of May as a whole, there appears to have

been little net change in liabilities.
Transactions in securities other than Treasury issues resulted
in a small net inflow of funds in April.

Net foreign purchases of U.S.

securities (primarily stocks) amounted to $.2 billion, about the same
level as the average for the first quarter.

About half the April

IV - 7

increase was credited to European countries and the other half to "other
Asian" (probably OPEC) countries.

U.S. net pruchases of foreign securities

continued fairly strong in April but not at the unusually high pace of
the first quarter.

Purchases of new foreign bond issues amounting to

$.2 billion accounted for virtually all of the transactions; the new
issues were primarily by the Asian Development Bank, France, and Canada.
In May, purchases of new bond issues were at about the same level as in
April and were almost entirely Canadian.
U.S. liabilities to foreign official agencies declined by $.7
billion in April.

Official holdings of OPEC countries at the Federal

Reserve Bank of New York accounted for all of the increase following
a sharp decline in March.

The March decline primarily reflected a delay

in tax collections by Iran; Iran's tax collections in April were initially
deposited at the FRBNY but were withdrawn later in the month.

Preliminary

weekly data indicate that in May liabilities to official accounts increased somewhat; major foreign central banks have purchased around
$1/2 billion in the past four weeks.

There was little change in OPEC

holding at the NY Fed in May.

U.S. Merchandise Trade
In April, the U.S. merchandise trade balance (balance of payments basis) was in surplus by $2.2 billion at an annual rate.

During

the first quarter, the monthly balances fluctuated widely mainly because

IV - 8

of variations in fuel imports resulting from uncertainty regarding
imposition of oil import fees.

Recorded oil imports were very high

in January (when importers accelerated filing of documents to avoid
the $1 import fee which was imposed on February 1), and very low in

March.

In April fuel imports returned to more "normal" levels.

The

trade balance excluding fuel imports has varied by only small amounts
in the past four months.
For the first four months of 1975 combined, the trade balance
was in surplus by $4.9 billion at an annual rate, compared with a deficit
rate of $6.3 billion in the last four months of 1974.

This swing from

a deficit to a surplus reflected a $2.4 billion annual rate increase
in exports and a $8.7 billion annual rate decline in imports.
accounted for only about one-fourth of the import decline.

Petroleum

The largest

part of the $11.2 billion swing in the balance occurred because the
volume of nonfuel imports declined sharply as U.S.

economic activity

contracted (see line 9 of the table below).

U.S. MERCHANDISE TRADE (BOP basis)

Amounts, Bil.$, SAAR
Sept.-Dec. Jan.-Apr.
1974
1975
1.

Changes
Percent
Value Price Volume

-6.3

-4.9

2. Exports
3.
Agricultural

103.5
21.9

105.8
23.3

+2.3
+1-.9

--2.2
-+8.6

4.
5.
6.

G1.6
(26.4)
(55.2)

32.0
(27.7)
(54.3)

-+-.4
(+1.3)
(-.9)

+.5
(-4.9)
(-1.6)

109.7

101.0

-8.7

-7.9

-4.2

-11.7

30.6
79.1

28.4
72.6

-2.2
-6.5

-7.1
-8.2

+.8
-;4.5

-7.8
-12.3

7.
8.
9.

Trade Balance

Amount
(Bil.$)

Nonagricultural
Y.chinery
Other

ImRorts
Fuels
Nonfuels

e) April 1975 estimated.

+11.2

-4.
2e
--e
-. 6

-..0 e
-a+9.5

4.7 e -4.0
(-7.5)e(-2.5)
(+3.6) (-5.1)

IV - 9

Nonfuel imports, for the first

four months of 1975 combined,

declined 12 percent in volume from the Sept.-Dec. 1974 level.

The drop

was broadly distributed among most commodity categories -- industrial
materials (other than petroleum), capital equipment, automotive imports
from Canada, foodstuffs (largely the result of sharply reduced sugar
arrivals resulting from excessive domestic inventories), and other
consumer good imports.

Imports of cars from Europe and Japan were about

10 percent below the volume of imports in Sept.-Dec. 1974.

However,

the number imported exceeded sales of these foreign cars which suggests
a continued drawing down of inventories this year.

The overall average

price of nonfuel imports increased by 4.2 percent in the January-April
period; declines in the import prices of various materials (e.g., steel,
copper, tin, etc.) were more than offset by increases in prices of other
materials and of manufactured goods.
Imports of fuels declined in January-April, largely because
of reduced economic activity in the United States.

The price of imported

oil was $11.59 in April and has varied little over the four month period.
Agricultural exports, for January-April, accounted for most of
the total export rise from the last four months of 1974.

However, all of

the increase occurred in January; since then both the volume and price of
agricultural exports have declined.
The value of nonagricultural exports increased by less than
1 percent in the January-April period.

Increased shipments of some

industrial materials such as coal, nuclear fuels, as well as nonmonetary

gold, machinery, and automotive equipment to non-Canadian destinations
were largely offset by declines in other industrial supplies, civilian
The value of machinery

aircraft, and automotive equipment to Canada.

exports has been buoyed by sharp price increases; it is estimated that
the volume of machinery exports was down by about 2-1/2 percent in
January-April after rising throughout 1974.

The volume of all nonagricultural

commodities combined is estimated to have declined by about 4 percent as
foreign activity continued very weak during the first four months of the
year.

The volume of export orders for durable goods (excluding motor

vehicles and aircraft) which had dipped in the last half of 1974 picked
up slightly in January-April, returning to nearly the level of early
1974.
By area, the value of U.S. exports has continued to increase to
all areas except Canada and Japan.

Exports to non-oil-exporting devel-

oping countries have been surprisingly strong.

IV - 11

Economic Activity and Prospects in Major Foreign Industrial Countries

In practically all the major industrial countries, the fall
in output which began in late 1973 or early 1974 has been continuing
through the second quarter of this year, according to data now available.
The impact of this recession on the OECD countries as a group has been
intensified by a very high rate of inflation, which has cut into real
income and savings.

In addition, restrictive actions taken in various

countries to combat inflation have contributed to a deepening of the
recession.
Industrial Production in Major Industrial Countries
(Percentage change from preceding period, seasonally adjusted)

1974
4Q

Jab.

1975
Feb.

Mar.

Apr.

-1.3 -2.8

-2.3

0.9

-0.8

0.3

1.1

-6.6 -3.1

0.9

0.0

-3.4

-0.6

-2.1

-3.0 -3.1

1.0

0.0

-5.5

4.2

0.8

-2.9 -0.4

2.0

0.6

-0.9

2.4

-0.7

-2.5

-7.5

-1.7

1.9

1.9 -8.1

9.6

-2.0 -3.3

-7.8

-7.7 -4.2 -0.6

1.5

0.5

-8.0 -3.1 -2.2 -1.3

-0.4

2.4 -0.9

France

3.0

Germany

0.0

Italy

-1.2

Canada

1/
United Kingdom

Japan 2/

-2.0

United States 2 /

-1.7

0.5

0.1 -3.3

-1.9e

e - FRB staff estimate
1/ All Industries
2/ Mining, Manufacturing and Utilities
Sources: National sources; Italian data seasonally adjusted by Federal
Reserve Staff. Data relate to all industries excluding construction,
except as indicated in notes.

IV - 12

Because of steep drops in December, production in the first
quarter of 1975 was lower than in the last quarter of 1974.

However,

there were signs that the fall in output may have been moderating.
Production in Germany, Italy and the United Kingdom steadied or even
rose slightly early in the year, although in a number of cases further
declines were recorded in March.

While month-to-month changes are

difficult to interpret, preliminary data for April, available for a few
countries, show Italian output recovering to January/February levels,
and Japanese output was again up slightly.

Staff seasonal adjustments,

however, make it seem likely that German production fell again in April.
Preliminary data for the United Kingdom, Japan and Germany suggest that
real GNP continued to decline in most major countries during the first
quarter of 1975, except in the United Kingdom, where GDP rose very slightly.
As the recession has lengthened, production declines in the
major countries have in some cases become rather large.

Comparing latest

figures against the peak quarterly averages reached in late 1973 or early
1974, these decreases range from under 6 per cent in the case of the
United Kingdom, to nearly 18 per cent in the case of Italy.
With the recession lengthening, there are now considerable
margins of unused capacity.

In Germany, for instance, the economic

institutes estimate that industry is operating at only about 75 per cent
of capacity, which is lower than the level reached in the sharp 1966-67
downturn, and in Japan the utilization rate appears to be somewhat less
than 80 per cent.

Construction -- both for residential and business

IV - 13
purposes --

remains quite depressed,

and so far has been buoyed only

slightly by the public investment programs and aid to housing announced
Production of consumer durable goods generally

in several countries.

continues weak as a result of the pessimistic state of consumer confidence,
and automobile production is at low levels for both structural and
confidence reasons.

With the possible exception of France and Canada,

business fixed investment seems likely to fall further in the first
half of 1975 from second half 1974 levels.
Since our last review of this subject in March, the weakness
in output has spread to sectors such as steel, chemicals and certain other
producers' goods.

Until then, some of these had continued to enjoy near

boom conditions, but output has begun to fall in these sectors also.
As a result of these developments,

seasonally adjusted unemploy-

ment in the major countries has continued to rise, and in most cases has
exceeded previous postwar peaks.

With the exception of Denmark,

which

Unemployment Rates in Major Industrial Countries
(Per cent of labor force, monthly rates or averages, seasonally adjusted)

1975
Apr.
May

5.3

5.6

6.9

7.2

2.3

2.5

3.2

3.8

4.1

1.9

2.4

3.0

3.6

3.7

4.7

5.1e

Great Britain

2.4

2.7

3.1

3.3

3.6

Italy 1/

2.8

2.7

2.8

3.2

2.8

Japan

1.3

1.2

1.3

1.7

United States

5.2

5.1

5.5

6.6

8.4

8.9

Canada

5.4

5.3

France

2.3

Germany

e - FRB staff estimate

1974
Q3

7.1

.8e
9.2

1/ Quarterly data

Sources: OECD Main Economic Indicators,
Embassy in Paris for French data.

and national sources; U.S.

IV - 14

this spring had over 11 per cent of its labor force unemployed, most
of the smaller industrial countries have had lower jobless rates than the
large ones, but unemployment in these countries has

rise significantly.

now also begun to

First preceding and now accompanying the rise in

outright unemployment has been an increase in the number of workers on
short-time in various countries.

In most countries, butespecially

Japan and Italy, this has meant that unemployment figures do not fully
reveal the degree of underutilization of labor resources.

Consumer price increases in the major countries are quite far
apart on a year-to-year basis --

ranging,

for the most recent three months,

from 6.0 per cent in Germany to 21.3 per cent in Italy.

In recent months,

however, annualized rates of price change show some convergence toward
single digit inflation.

Quarter to quarter rates, for instance, have come

down considerably in Italy, and a similar if

lesser deceleration is evident

in Japan, France, Canada, and some of the smaller countries.

In the

United Kingdom, however, the annual rate of increase from November-January to
February-April was over 29 per cent.
Consumer Prices in Major Industrial Countries
(Percentage change from previous period, not seasonally adjusted)

Change in Latest

1974
Q3
Q2

1975
Jan. Feb. Mar. Apr. May

Canada

2.4

3.3

3.0

2.7

2.2.

0.5

0.8

0.5

France

3.7

4.1

3.3

3.1

2.8

1.1

0.8

0.9

Germany
U.K.

2.4
4.1

1.6
5.9

0.9
2.5

1,4
4.5

1.9
6.0

0.9
2.6

0.5
1.7

0.5
2.0

0.8
3.9

Italy

5.4

5.2

6.0

6.2

3.5

1.3

1.4

0.1

1.4

Japan

9.9

4.7

3.7

4.4

1,5

0.5

0.3

1.0

2.2

U.S.

2.8

3.0

2.9

1.8

0.5

0.7

0.4

0.5

e - FRB staff estimate.
Sources: National sources.

0.8.

0.6

1.Oe

3 months from
Preceding
Year
3 months,
Earlier annual rate
10.8

7.4

13.3

10.9

6.0
20.9

7.5
29.2

21.3

13.1

14.le

13.2e

10.5

6.9

IV - 15

Recent movements in wholesale prices of manufactured goods
show similar trends, with price changes moderating toward more normal
levels in most countries.

In Japan and France they have actually been

negative in recent months, but in the United Kingdom wholesale price
increases are still running over 27 per cent at an annual rate.
As surveyed in the last Greenbook, reflationary fiscal and
monetary policies have been adopted in most of the industrial countries.
Significant countercyclical actions have been taken primarily in Germany
and France among the large countries.

A new Canadian budget and a Japanese

announcement on fiscal measures are expected later this month.

Most

countries have provided special assistance to housing and construction
in general.

Some have reduced personal tax rates to offset fiscal drag

and help maintain real disposable income.

Among other measures, the

Germans and French have incorporated tax or rebate incentives to encourage
capital investment by private enterprises, and the British adjusted
corporate tax rates to help improve firms' liquidity positions.

Fiscal

authorities in a number of countries now appear to be waiting out the

effects of these generally expansionary measures.

In a few cases,

such as in some of the smaller countries (Finland and Belgium) and,
on June 5,

in France, authorities have also announced impositions of

selective price controls or freezes.
A number of policy initiatives have been undertaken-by
monetary authorities in recent months.

June 7,

In mid-April, and again on

the Bank of Japan cut its bank rate.

In Germany, the Bundesbank

IV - 16

on May 22 reduced its discount and lombard rates for the sixth time
since last summer, and cut reserve requirements by 5 per cent of previous
levels.

The Bank of Italy (on May 28) and the Bank of France (on June 5)

also announced bank rate reductions.

Among the smaller countries, Austria,

Belgium and Denmark have also reduced discount rates.

In Italy, Belgium

and France credit ceilings have been liberalized, although in some
countries such ceilings at present pose no constraint to credit expansion,
due to the weak state of private and commercial loan demand.

Central

banks in several major countries have publicly encouraged domestic
financial institutions to cut their lending rates to stimulate activity,
although so far this has occurred only to a limited extent.
Prospects for economic recovery in the major industrial countries
are still clouded by great uncertainties.

Both national authorities and

outside observers have had to revise their forecasts downward several
times.

The state of consumer and business confidence is depressed

almost everywhere, although recent survey results in Japan, Germany and
France (though not in the United Kingdom) show some improvement in
consumer sentiment compared to earlier in the year.

Likewise, businessmen's

concerns over undesirably high inventory levels have lessened somewhat,
but inventory/sales ratios are still troublesome, especially in Japan
and Canada.

In Germany, inventory buildups were low during 1974, and

most inventory adjustment now appears to be over.

Industrial orders

data, however, in countries for which they are at least partially
collected, still show no concrete signs of an output recovery, and new
foreign orders appear especially week.

IV - 17

Which sectors may lead an economic upturn is a matter of
debate in various countries.

Several countries, but especially the

United Kingdom, are looking to exports, although if forecasts of a 2-3
per cent decrease in the volume of world trade in 1975 over 1974 are
correct, it is unlikely that exports can serve as a leading sector for
the OECD countries taken together.

In general, authorities in most

industrial countries expect private consumption to be the leading sector
in the recovery, and are carefully watching retail sales data.

Following

a small decrease (-0.4 per cent) in real disposable income in the major
OECD countries during 1974, consumers' real income may rise between 1 and
2 per cent this year, according to OECD Secretariat estimates, and could
serve as a source of strength in the recovery.

At the same time, however,

personal savings rates, already exceptionally high in Japan, have risen
appreciably in several countries, notably the United Kingdom, Canada
and Germany.

In the latter, personal savings reached almost 16 per

cent of disposable income, according to latest data.

The savings rate

appears to have fallen slightly only in France and Italy.

A further

decline in inflation rates and restoration of consumer confidence might
contribute to a decrease in savings rates and lend strength to a
consumption-led upturn.
With capacity utilization at very low levels, it seems unlikely
that business investment will serve as a source of relief in the present

recession.

In Canada and the United Kingdom there is strong demand for

energy-related investments, but elsewhere most observers expect that

IV - 18

in 1975 real private fixed capital formation will be lower than in 1974,

although some recovery is possible for the second half of the year.
Most observers agree that economic recovery in the major foreign
countries is likely to be slow by comparison with historical experience,
and that considerable slack will remain in labor and material resources
for the foreseeable future.

Given known movements in production and the

sluggishness of order inflows so far this year, it seems inescapable that
industrial output will be lower in the first half of 1975 than in the
second half of 1974, and probably for the year as a whole.

With the

exception of France, the same conclusions apply with respect to real
GNP. And While inflation rates in most countries are decelerating, there
may well be limits on further decreases in rates of price change, due
to the continued working through of last year's high wage agreements
and associated cost-of-living escalators, likely new petroleum price
increases, and, importantly, the desire of enterprises to improve their
profit margins.

These factors may well combine to form a rather high

floor under inflation rates in the near future, particularly in the
absence of a strong economic recovery with associated large productivity
increases.

A- 1
GREENBOOK APPENDIX*
The President's Mid-Session Budget Review
The President recently released his revised budget outlook
for fiscal years 1975 and 1976. As Table I shows, the budget deficit
is now expected to be $42.6 billion in FY 75 and $59.9 billion in FY 76,
both about $8.0 billion above the February estimate. The FY 76
deficit projection presented in the Mid-Session Review provides little
new information, since it is about equal to the $60 billion target
announced by the President in late March. However, the Mid-Session
Review does offer the first detailed look since the February budget at
the assumptions behind the Administration's spending and revenue
estimates.
Table I
Comparison of Alternative Budget Estimates
(Fiscal years; billions of dollars)

1976

1 Q7
February
Estimate

Current
Estimate

FRB(June)
Greenbook

February
Estimate

Current
Estimate

Congres.
Resolution

FRB (June)
Greenbook

Receipts

278.8

281.0

297.5

299.0

298.2

299.2

Expenditures

313.4

323.6

322.0

349.4

358.9

367.0

Deficit

-34.7

-42.6

-41.0

-51.9.

-59.9

-68.8

-67.8

Fiscal Year 1975
The Administration now estimates that outlays will be
$323.6 billion,up from the $313.4 billion forecast earlier this year,
and receipts are estimated to be $281.0 billion, $2.2 billion more than
in February. Most of the FY 75 outlay revision has been due to:
Congressional inaction on the President's proposed budget reductions and
Congressional passage of the Tax Reduction Act of 1975 which mandated a
$50 cash payment to social security recipients. Higher defense purchases
and increased participation both in the foodstamp and veterans programs
*

Prepared by James S. Fralick, Economist, Government Finance Section,
Division of Research and Statistics.

A- 2
also increased projected outlays in the current fiscal year.
The estimates provided in the Mid-Session Review indicate that
total outlays rose by a projected 21.0 per cent in FY 75 following a 9
per cent rise in FY 74. Not surprisingly, most of the FY 75 gain was
due to higher outlays for income security and human resources, each responding to rising prices and higher levels of unemployment.
The staff now estimates that FY 75 expenditures will be $322.0
billion, slightly below the $323.6 billion estimated by the Administration. Slightly different assumptions regarding defense spending, income
security outlays and the timing of V.A.-held mortgage sales to private
investors account for most of the discrepancy between the Greenbook
and the Administration's forecast. It should be noted that since 1970
each Mid-Session Review has overestimated actual budget outlays by about
$1.0 to $3.0 billion. This is illustrated in Table II.
Table II
Comparison of Mid-Session Forecasts (MSF) with Actual
Budget Outlays and Receipts
(Fiscal years; billions of dollars)

1973

1974
Actual

1975 est.
FRB
MSF

MSF

Actual

MSF

Outlays

249.8

246.5

269.5

268.4

323.6

322.0

Receipts

232.0

232.2

266.0

264.9

281.0

Deficit

-17.8

-14.3

-3.5

-42.6

-41.0

On the receipts side, the Tax Reduction Act is estimated to
have lowered FY 75 revenues by $4.3 billion more than the tax proposals
contained in the February budget. This added tax cut was more than offset by Administration reestimates particularly of nonwithheld individual
income taxes. This revision reflects a significant underestimate by
the Treasury of CY 74 personal tax liabilities and confirms a large
upward response in personal tax rates to inflation induced gains in
nominal incomes.
Fiscal Year 1976
The President's current estimate of FY 76 outlays is $358.9
billion, $9.5 billion above the February forecast. Approximately $3.8
billion of this increase is due to Congressional inaction on the
President's proposed deferrals and rescissions. Most of the remaining

A- 3
$5.7 billion increase in spending is due: (a)to increased outlays
for the public employment program, (b) to higher participation rates
in the veterans and foodstamp programs and (c) to the extension of
unemployment compensation benefits. These increases are offset to some
extent by reduced energy equalization payments due to a postponement until September 1, 1975 of the effective date of the President's energy
program and by a shift in the petrodollar financing facility from a
direct loan to a loan guarantee program.
The budget estimates presented in both the Mid-Session Review
and the February budget are based on the assumptions that the Congress
will approve the President's energy program. The main elements of that
program are: (a) a $2 import fee on imported crude oil effective June 1,
1975, (b) a $2 per barrel excise tax on domestic crude oil beginning
September 1, 1975, (c) the complete decontrol of all oil and all new
natural gas prices and (d) a windfall profits tax. It should be noted
that the President, in announcing the $2 import fee on imported oil,
indicated that he might consider a phased decontrol program and a windfall profits tax with a plowback provision, but these proposals were
not incorporated into the Mid-Session Review.
The February Budget and the Mid-Session Review both assume
that any energy related tax increases will be completely passed back
to the economy in the form of new individual and corporate tax cuts,
and energy equalization payments to compensate low income individuals
and all levels of government for higher energy prices. In addition,
the outlay estimates contained in the President's revised budget

message assume that the provisions of the Tax Reduction Act of 1975 are
not extended; that there are no Congressionally mandated cuts in defense
spending; that Federal pay raises are held to 5 per cent in October, 1975;
and that revenues from the sale of offshore oil leases (an offset to
outlays) reach $8.0 billion, up by $5.7 billion from the likely FY 1975

level.
The Mid-Session Review Compared to the Staff's Estimate

The staff now forecasts that FY 76 spending will be $367
billion, approximately $3.0 billion more than the Administration's
estimate. As Table II shows, the staff has removed the energy

A- 4
Table III
Reconciliation of Staff and Administration Outlay Estimates
(Fiscal year 1976; billions of dollars)

$358.9 billion

Administration's estimate (6/1)
Staff adjustments: Total
Reduction of projected offshore
oil lease sales 1)
Removal of outlays associated
with energy package

Higher pay raises and rejection
of remaining caps
Congressional rejection of

+8.1
+3.0
-5.2
+2.8

remaining deferrals and

rescissions
Assumptions about weaker economy
Higher outlays for Public
Service Jobs

+5.8
+1.1
+ .6

Staff budget estimate (June

Greenbook)

$367.0 billion

1) In budget accounting, an oil lease sale is treated as an offset to
outlays: thus a reduction in projected oil lease sales results in
an expenditure increase.
2)

It is estimated that the staff's assumption of higher oil prices serves
to increase defense outlays by $.6 billion.

equalization payment, but this is more than offset by an anticipated
shortfall in offshore oil sales, and by Congressional inaction on the
5 per cent cap on programs tied to the CPI and on the remaining deferrals
and rescissions. A detailed examination of the status of the budget
reductions proposed by the President is shown in Table IV.

A - 5
Table IV
Current Staff View on President's Proposed Budget Reductions

Total Reductions originally proposed
Less previously recommended reductions now in
President's budget:
Congressional inaction on deferrals and
rescissions
Congressional action on foodstamps
Inaction on "cap" for OASDI and SSI raises
Release of $2.0 billion highway funds
Less Staff adjustments:
Rejection of remaining caps
Congressional rejection of
remaining proposed reductions
Equals Realized Budget Reductions

$17.0
5.4
$1.0
.7
2.3
1.4
8.6
2.8
5.8

Staff Estimate)

3.0

In contrast to the Administration's revenue assumptions, the
staff is assuming that most of the provisions of the Tax Reduction Act
of 1975 will be made permanent. Furthermore, the staff estimates do
not include a large part of the net increase in revenues associated with
the President's energy programs. We are, however, assuming that the
$2 per barrel fee on imported crude oil and the 60 cent tax on imports
of refined oil products will be extended through FY 76. As Table V
indicates these adjustments are more than offset by additional tax
receipts mainly due to different tax rate assumptions, including
different estimates of yields on payroll taxes.

A- 6
Table V
Receipts Reconciliation

(Fiscal year 1976; billions of dollars)

Administration's receipts est.

Staff adjustments: Total
Removal of energy package other
than current import fees*
Extension of Tax Cut Act of 1975
Net Effect of Different Income and
Tax Rate Assumptions
FRB Revenue Estimate (June Greenbook)

$299.0

(6/1)

+.2
-2.2
-4.9
+7.3
$299.2

The June Greenbook incorporates a $2 per barrel import fee with a
total estimated revenue gain of $3.4 billion.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 16-17, 1975 : Greenbook Part 2

FRASER