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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

June 13,
By the Staff
Board of Governors
of the Federal Reserve System

1973

TABLE OF CONTENTS
Section
I

DOMESTIC NONFINANCIAL SCENE

Page

Summary and GNP Outlook . . . . . . . . . . . . . . . . . . . -- 1
Industrial production . ..
.
. . . . . . . . . . . . . . .-- 8
Retail sales . . . . . ..
. ......
. . . . . . . .
. .
- 8

Unit sales of consumer durables

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

-.10

Consumer surveys ... .
. . . .
. . . . . . . . . . .
..
.
11
Construction and real estate . . . .
.. . . . .
.
. . . .
-14

New capital spending plans . . . . . . . . . . . . . . . .
Manufacturers orders and shipments . . . . . . . . . . ....
Inventories

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

. -16
-17

. . . . .

-19

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

Cyclical indicators .

-20

Labor market . . . . . . . . .
. . . . . . ..
. ..
. . . . -21
Unemployment . . . . . . . . . . . . . . .
. ..
. . . . .
. -23
Earnings
.........
.
. . . . . . . . . ..
.
-24

. . . . . . . . . . . -26

Industrial productivity and labor costs
Minimum wage . . . . . .

. . .

. . . . . . . . . .

. -27

Industrial relations . . . . . . . . . . . . . . . .....
Consumer prices. .
. . . . . . . . . . . . . . . .......
Wholesale prices . . . . . . . . . . . . . . . . . . . . . .
. . .

Agriculture....

. . . . ..

Farm land values and farm credit ..

. . .

. . . . .

-36

. . . . . . . . . . . .. -37

DOMESTIC FINANCIAL SITUATION
Summary . . ..
Monetary aggregates

-29
-31
-33

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

. . . . . . . . . .. . . .1
. . . . . . .
.
.
.

Bank credit . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Nonbank financial institutions . . . . . . . . . . . . . . ..
- 9
Consumer credit. . . . . . . . . .
. . . . . . . . . .
Short-term markets ..
..
. . . . . . . . . ....
. .
Long-term private securities markets . . ..
.. .
. .

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

Mortgage market

Federal finance

. . .

. . . . . . . . . .

. .

INTERNATIONAL DEVELOPMENTS
Summary and outlook

-11
-12
-16

-20

......

-22

III

.......

. . . .

. .

. . -

Foreign exchange markets . . . . . . . . . . . . . . . . . ..
Euro-dollar markets.

. . .

U.S. balance of payments.
U.S.

foreign trade

. . .

. . . .

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

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

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

. - 5

. .

Trade developments in other industrialized countries . . . . . -13

DOMESTIC NONFINANCIAL
SCENE

June 13

1973

I-- T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data

Per Cent Change From
Three
Preceding Periods
Year

Release
Period

Date

Data

Period

Earlier

(At Annual Rates)

88.4
5.0
2.7-

0.71
5.01/

6/1
6/1
6/1

75.2
19.7

55.5

2.4
1.0
2.9

37.3

37.3-/

3.84

QI
QI
QI

6/1
6/1
5/25
5/25
5/25

115.3

3.1
4.4

147.3
127.7

10.5
5.9

Average weekly hours (hours)

May

6/1

40.8

Unit labor cost (1967=100)

Apr.

5/29

122.1

15.9

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

May

5/15
5/15

123.4
130.5
118.6
79.4
126.8

5.9
8.3
12.3
-13.4
2.8

12.9
-5.0
9.0

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

Apr.
Apr.
Apr.
Apr.

5/22

7.6
16.9
4.9
3.5

8.9

5.1

5/22
5/22

130.7
136.4
122.4
137.0

23.3
5.0
3.8

11.5
3.2
3.5

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

May
May
May

6/7
6/7
6/7

133.3
125.6
154.3

24.5
14.5
49.4

21.6

15.0

12.9
7.0

37.7

29.1

Personal income ($ bil.)

Apr.

5/15

1008.9

9.1

9.3

9.7

Civilian labor force
Unemployment rate
Insured unemployment rate
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)

May

6/1

May

6/1

Apr.

5/24

May

Hourly earnings ($)
r/
Output per manhour (1967=100)r/
Compensation per manhour (1967=100)Unit labor cost (1967=100) rI
Manufacturing:

May

May
May

May

May
May
May
May

5/15
5/15
5/15
5/22

2.8-

37.26.3

41.0-

2.31/
1/

3.8
5 1/
5.12
2.7-'
2.7
3.1
2.6

41.0

3.6

5.8-

3.&3.7
4.6
3.4

37.16.1
4.9
7.2
2.2

40.5'
2.7
9.0
6.8

7.6
6.9

15.7
1.5
9.7

(Not at Annual Rates)
4,
($ bil.)-

1973

6/5

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense

Apr.
Apr.
Apr.
Apr.

5/31
5/31
5/31
5/31

41.7
13.1
10.8
2.3

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

Apr.
Apr.
Apr.

6/11
6/11
6/11

1.41
1.54
1.28

1.56-

Apr.

6/11

.798

May
May

6/11
6/11

May
May
May
Apr.
Apr.

6/6
6/6
6/6
5/16
5/29

Plant & equipment expen.

Ratio:

Mfrs.' durable goods inventories
to unfilled orders

Retail sales,

total ($ bil.)

GAF
Auto sales, total (mil. units) 3/
Domestic models
Foreign models
3/
Housing starts, private (thous.)'
Leading indicators (1967=100)
1/

Actual data. 2/
taken May 1973

Not seasonally adjusted.

13.2

100.12

5.9
5.9
3.5
19.1

22.7
21.7
22.9
16.1

1 43 1
1.57-/
1.29/

1.52*
S1/
1.67-

1.29-

1.3 6'

.817- 1

.8551

.925 '1

41.6
10.9

1.4
3.0

0.8
0.9

12.0
10.6

11.93
10.06
1.87
2,103
161.5

2.1
2.8
-1.5
-6.5
-0.6

0.3

11.3
9.5

At annual rate.

-1.5
-0.8
-1.2
0.9
1/
1.251.5-

1.6
-6.2

-15.8
2.9

22.2
-4.6
15.7

Commerce survey

I-

DOMESTIC NONFIANCIAL D EVELOPM TS
EN
The staff is now projecting expansion of over $36 billion in
n

ominal GNP this quarter--$2 billion more than four weeks ago,

annual rate of increase of almost 12 per cent.

and an

The upward revision

reflects a considerably more rapid rate of price increase than assumed

earlier.

Projected expansion in real GNP has been reduced somewhat--to

an annual rate of 5.7 per cent.
A slowing in the pace of real growth from the 8 per cent
annual rate of the two preceding quarters is suggested by the recent
course of industrial production and developments in the labor market.
The rise in the April index of industrial production has been revised
down slightly and the May advance is estimated at an annual rate of 6

per cent.

In the first quarter, industrial production had increased

at an 8.5 per cent annual rate.

But gains in output were still

widespread

in May among consumer goods--both durable and nondurable--business
equipment,

construction products, and nondurable materials.

Growth in

nonfarm payroll employment has moderated considerably in the last two
months, following an exceptionally rapid rise over an extended period.
Consumer spending is projected to rise about $19 billion this
quarter, following a remarkable first quarter increase of $28 billion.
The advance retail sales estimate for April has been revised to show a

sharper decline than first reported; in May, despite an increase of
1.5 per cent, sales were only about one-half per cent above the first
quarter monthly average.

Unit auto sales in May were at an annual rate

of 12.0 million (10.1 domestic), a little below the first quarter average.

I-2
The long-predicted decline in residential construction
activity is

clearly under way, with both housing starts and permits

down appreciably further in April.

On the other hand, net exports of

goods and services are now expected to improve further in the second
quarter.
Business demands continue strong.

A number of indicators

suggest continued expansion in business fixed capital outlays.

Newly

approved capital appropriations by manufacturers rose 15 per cent further
in the first

quarter,

and the unspent backlog also rose sharply.

Manu-

facturers' new orders for durable goods have continued generally
expansive,

despite a small decline in April.

The square footage of

commercial and industrial construction contracts has remained at
advanced levels.

Prospective strength in business demands for inven-

tories is suggested by the prevailing, unusually low inventory/sales
ratios.

But we have reduced somewhat our earlier estimate of second

quarter inventory investment, partly on the basis of the quite moderate
increase in April book values, which apparently reflected to some extent
delays in deliveries.
The rise in wage rates slowed in May after some pick-up in
the two preceding months.

Since last November,

the hourly earnings

index has increased at a 5.4 per cent annual rate.

Recent wage settle-

ments in the rubber and electrical machinery industries on the whole
appear relatively moderate.

I-3
The rise in wholesale prices of farm products and foods
accelerated sharply in May, following a slowing in April.

Prices of

industrial commodities rose 1.2 per cent, about the same rapid pace as
in the preceding three months.

Increases were widespread among crude

and intermediate materials and finished goods.

Over the past 6 months,

the wholesale price index has increased 10 per cent, not at an annual
rate, with prices of farm products and foods up 21.5 per cent and
industrial commodities up over 5 per cent.
Outlook.

For the last half of 1973, our GNP projection

continues to assume growth in the monetary aggregates at rates consistent
with longer-term expansion in M 1 at about 5-1/4 per cent, and some further
rise in market interest rates from current levels.

The assumptions with

respect to Federal expenditures and tax policies remain unchanged.
The Administration is reportedly considering new stabilization actions
but, we have no basis as of this writing for changing our assumptions
as to price and wage restraints.
Increases in both nominal and real GNP in the second half of
the year are now expected to be somewhat smaller than in the projection

of four weeks ago.

Real GNP is now projected to rise at an annual rate

of 3.5 per cent in the fourth quarter, rather than 3.9 per cent.
The rise in the GNP private fixed weight price index is still projected

to slow to a 4.7 per cent annual rate in the fourth quarter.
The downscaling in GNP reflects in part a somewhat smaller
increase than projected five weeks ago in business spending for fixed
capital.

The latest Commerce survey taken in May, indicates an increase

I - 4
of around 13 per cent in business spending for plant and equipment
this year, about one-half per cent less than in the March survey, and
we have taken this change into account in our current projection.

The

Commerce increase is appreciably smaller than indicated by the McGrawHill survey taken a few weeks earlier, but we have discounted most of
this because of several differences between the two surveys.
factor in making for a smaller rise in nominal GNP is

A second

that with improve-

ment in the trade surplus coming earlier than had been anticipated, a
smaller increase is now projected for the second half.
The accompanying summary table contains projections only
through 1973 but the detailed green tables show staff projections for
the four quarters of 1974.

These longer-run projections will be

discussed in the course of the FOMC presentation next week.

I- 5
STAFF GNP PROJECTIONS

Change in

Per cent increase, annual rate
Gross private
product

nominal GNP
$ billion
5/9/73 Current

1971-

Real GNP
5/9/73 Current

fixed weighted

Unemployment

price index
5/9/73 Current

rate
5/9/73 Current

74.0

2.7

4.5

5.9

101.4
131.3

101.4
134.4

6.4
6.8

6.4
6.7

3.3
4.6

3.3
5.0

5.6
4.8

5.6
4.9

31.0
30.3
24.6
30.9

6.5
9.4
6.3
8.0

4.5
2.5
2.9
3.1

5.8
5.7
5.6
5.3

40.6
34.5

43.0
36.5

7.9
6.0

8.0
5.7

6.7
5.3

7.4
6.3

5.0
4.9

5.0
5.0

-III

29.5

28.3

4.8

4.3

4.4

4.5

4.8

-IV

28.0

27.0

3.9

3.5

4.7

4.8

116.8

7.6

3.3

- .6

132.6

134.8

5.7

5.4

5.3

5.8

- .5

1972-'
1973
/1/
1972-Il
-11-III1
-V
t'

1973-I
-II

Change:

1971-IV to
1972-IV

1972-IV to
1973-IV
1/ Actual.

CONFIDENTIAL - FR

June 13,

1973

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

1972

Gross National Product
Final purchases
Private
Excluding net exports

1973
Proj.

1972
III

1973
Projected
III

1151.8
1145.9
891.3
895.5

1286,2
1273.0
997.6
997.8

1164.0
I156.0
900.4
903.8

1194.9
1184.6
925.3
928.8

1237.9
1231.0
964.3
966.5

1274.4
1261.9
989.6
989.5

1302.7
1286.7
1009.1
1009.0

1329.7
1312.2
1027.4
1026.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

721.0
116.1
299.5
305.4

728.6
118.6
302.0
308.0

745,7
120.8
310.4
314.5

180.4
54.0
120.5
5.9
5.6

183.2
54.4
120.7
8.0
7.9

193.4
57.0
126.1
10.3
10,1

773.6
130.4
322.6
320.6
199.7
59.4
133.5
6.8
6.5

792.5
133.4
332.5
327.6
209.5
58.4
139.0
12.5
12.5

808.9
135.0
339.2
334.7
216.1
56.1
144.0
16.0
16.0

823.8
136.5
345.4
341.9

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

799.7
133.8
334.9
331.2
211.3
57.1
141.1
13.2
13.0

-4.2
73.7
77.9

-0.2
93.3
93.5

-3.4
74.4
77.8

-3.5
79.6
83.1

-2.2
87.6
89.8

0.1
92.0
91.9

Net exports of goods and services 1/
Exports
Imports

220.0
54.5
148.0
17.5
17.0
1.1
98.5
97.4

0.1
95.0
94.9

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

254.6
105.8
75.9
29.9
148.8

275.4
108.3
74.8
33.6
167.1

255.6
105.4
75.1
30.2
150.2

259.3
104.0
73.2
30.8
155.2

266.8
106.6
75.0
31.6
160.1

272.3
107.8
74.5
33.3
164.5

277.6
108.6
74.6
34.0
169.0

284.9
110.2
74.9
35.3
174.6

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

789.5
145.9

842.6
152.6

796.1
146.2

811.6
147.2

827.3
149.6

839.2
151.9

848.3
153.6

855.8
155.4

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

935.9
627.0
795.1
54.8
6.9

1026.4
690.2
877.0
56.3
6.4

939.9
630.8
798.8
50.8
6.4

993.9
668.1
850.4
56.5
6.6

1017.2
683.5
872.4
59.2
6.8

94.3
91.7

122.7
109.6

95.7
93.1

974.6
648.8
828.2
62.8
7.6
101.5
97.1

113.1
103.4

123.0
109.2

1036.7
697.3
84.1
54.0
6.1
125.0
111.2

1057.6
712.0
900.9
55.5
6.2
129.5
114.5

228.6
246.8
-18.1

262.1
266.0
-3.9
-2.0

229.8
241.6
-11.8

238.4
262.7
-24.3

252.5
260.0
-7.5

256.2
264.8
-8.6

266.7
267.3
-0.6

273.1
271.8
1.3

-13.5

-2.2

-4.7

-1.7

0.6

9.4

19.5

14,5

12.6

11.7

9.8

89.3
2.4
86.9
5.6

89.6
2.4
87.2
5.3

90.0
2.4
87.6
5.0

90.7
2.3
88.4
5.0

91,1
2.3
88.8
4.8

91.5
2.3
889.2
4.8

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

-1.9

State and local government surplus or
deficit (-), N.I.A. basis

12.7

12.2

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

89.0
2.4
86.5
5.6

90.8
2.3
88.5
4.9

Nonfarm payroll employment (millions)
Manufacturing
Industrial production (1967 - 100)
Capacity utilisation, fgs. (per cent)
Major

aterials (per cent)

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

2.5

72.8
18.9
114.4
77.9
89.6

75.4
19.8
124.1
82.1
94.4

73.0
19.0
115.0
78.4
90.6

73.8
19.3

74.6
19.6

75.2
19,7

75.7
19.8

176.1
19.9

118.4
80.2
92.2

121.0
81.3
93.6

123.5
82.2
94.3

125.3
82.5
94.7

1 26.5
12.4
194.9

2.38
10.94
9.32
1.61

2.12
11.71
10.01
1.70

2.37
11.53
9.91
1.61

2.40
11.69
9.90
1.79

2.40
12.23
10.27
1.96

2.14
12.10
10.25
1.85

2.05
11.50
10.00
1.50

1L.90
111.00
99.50
L.50

CGMP exports and imports estiates for 1972 have not been revised to reflect revised
estimates incorporating new seasonal factors; these revised estimates for 1972 and
projections for 1973 are:
-1.4
-2.6
-3.5
0.7
-4.2
Net exports of goods and services
88.1
80.1
73.9
93.8
73.5
Exports
89.4
82.7
77.3
77.8
93.1
Imports

Balance of Payments
corresponding
1.0
92.5
91.5

1.0
95.5
94.5

2.0
99.0
97.0

CONFIDENTIAL - FR

June 13,

1973

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

1974

Proj.
I
Gross National Product
Final purchases
Private
Excluding net exports

Projected
II
III

1385.1
1372.9
1070.2
1066.7

1354.6
1339.6
1046.1
1043.5

1376.0
1363.0
1063.1
1059.5

1395.2
1383.7
1078.0
1074.4

1414.7
1405.2
1093.4
1089.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

862.1
138.9
363.7
359.5

839.8
137.5
353.3
349.0

856.0
139.0
361.0
356.0

869.7
139.5
367.2
363.0

882.8
139.5
373.3
370.0

Gross private domestic investment

216.9

218.7

216.5

216.2

216.0

Residential construction
Business fixed investment
Change in business inventories
Nonfarm

50.6
154.0
12.3
12.3

52.7
151.0
15.0
15.0

50.5
153.0
13.0
13.0

49.7
155.0
11.5
11.5

49.5
157.0
9.5
9.5

Net exports of goods and servicesExports

3.5
104.6

2.6
101.5

3.6
104.0

3.6
105.5

4.1
107.5

101.2

98.9

100.4

101.9

103.4

302.7
115.2

293.5
113.8

299.9
115.0

305.7
115.6

311.8
116.2

77.5
37.7
187.6

76.9
36.9
179.7

77.2
37.8
184.9

77.7
37.9
190.1

78.2
38.0
195.6

864.0
160.3

859.8
157.5

863.0
159.4

865.4
161.2

867.7
163.1

1108.2
745.7
945.2
60.7
6.4

1081.2
727.6
922.4
60.6
6.6

1099.8
740.2
939.8
61.5
6.5

1116.5
751.0
951.9
59.6
6.3

1135.1
764.1
966.7
61.0
6.3

Corporate profits before tax
Corp. cash flow, net of div. (domestic)

128.8
116.0

131.0
116.3

130.0
116.3

128.0
115.9

126.0
115.5

Federal goverrment receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)

284.0
289.1
-5.1

278.8
281.3
-2.5

282.5
286.0
-3.5

285.6
292.1
-6.5

289.1
296.9
-7.8

5.0

1.2

4.2

6.0

8.4

Imports

Gov't. purchases of goods and services
Federal
Defense
Other
State & local
Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 - 100)
Personal income
Wage and salary disbursement
Disposable income
Personal saving
Saving rate (per cent)

High employment surplus or deficit (-)
State and local government surplus or

deficit (-), N.I.A. basis

5.9

7.6

6.0

5.0

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

92.5
2.3
90.2
5.2

91.9
2.3
89.6
4.9

92.3
2.3
90.0
5.1

92.7
2.3
90.4
5.3

93.1
2.3
90.8
5.5

Nonfarm payroll employment (millions)

76.8

76.4

76.7

77.0

77.2

19.7

19.8

19.7

19.6

19.5

128.0

127.4

127.9

128.2

128.4

81.4
94.3

82.1
94.7

81.7
94.5

81.1
94.2

80.5
93.9

Manufacturing
Industrial production (1967 - 100)
Capacity utilization, mfg. (per cent)
Major materials

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

Foreign models

1.80

1.85

1.80

1.78

1.77

10.19
8.69

10.75
9.25

10.25
8.75

9.50
8.00

1.50

Exports and imports projections for 1974 on Balance of Payments basis corresponding
to revised estimates for 1972 and corresponding projections for 1973 are:
5.0
4.5
4.5
3.5
4.4
Net exports of goods and services
108.0
106.0
104.5
102.0
105.1
Exports
103.0
101.5
100.0
98.5
100.7
Imports

CONFIDENTIAL - FR

June 13,

1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1972

1973
Proj.

1972
III

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

1973
Projection
III

Billions of Dollars----------------------

Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government

101.4
2.3
99.2
77.4
82.3
-4.8
21.8

134.4
7.3
127 1
106.3
102.3
-4 4
20.8

24.6
3.0
21.6
20.1
18.3
1.8
1.5

30.9
2.3
28.6
24.9
25.0
-0.1
3.7

43.0
-3.5
46.4
39.0
37.7
1.3
7.5

36.5
5.7
30.9
25.3
23.0
2.3
5.5

28.3
3.5
24.8
19.5
19.5
0.0
5.3

27.0
7.5
25.5
18.3
17.3
1.0
7.3

GNP in constant (1958) dollars
Final purchases
Private

47.8
45.8
40.6

53.1
48.2
46.6

12.2
9.8
11.1

15.5
13.8
13.8

15.7
18.8
18.6

11.9
8.2
7.2

9.1
6.1
5.3

7.5
6.1
4.5

Gross National Product

-------------------------- Per Cent Per Year---------------------Gross National Product
Final purchases
Private

9.7
9.5
9.0

11.7
11.1
11.9

8.9
7 6
9.1

11.0
9.9
11.1

15.2
15.7
16.9

11.8
10.0
10.5

8.9
7.9
7.9

8.3
7.9
7.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.4
12.2
7.7
7.8

10.9
15.2
11.8
8.4

8.5
16.5
6.5
7.4

9.4
7.4
11.1
8.4

15.0
31.8
15.7
7.8

9.8
9.2
12.3
8.7

8.3
4.8
8.1
8.7

7,4
4.4
7.3
8.6

Gross private domestic investment
Residential construction
Business fixed investment

18.7
26.8
13.9

17.1
5.7
17.1

14.0
12.1
5.0

22.3
19.1
17.9

13.0
16.8
23.5

19.6
-6.7
16.5

12.6
-15.8
14.4

7.2
-11.4
11.1

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

9.4
8.2
6.3
13.7
10.2

8.2
2.4
-1.4
12.4
12.3

2.4
-10.0
-17.8
8.1
11.5

5.8
-5.3
-10.1
7.9
13.3

11.6
10.0
9.8
10.4
12.6

8.2
4.5
-2.7
21.5
11.0

7.8
3.0
0.5
8.4
10.9

10.5
5.9
1.6
15.3
13.3

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
2/
Private GNP fixed weight index

6.4
6.2
6.7
3.0
3.3

6.7
6.1
7.3
4.6
5.0

6.3
5.0
7.0
2.4
2.9

8.0
7.0
8.5
2.8
3.1

Personal income
Wage and salary disbursements
Disposable income

8.6
9.4
6.8

9.7
10.1
10.3

7.7
6.6
8.3

14.8
11.5
14.7

Corporate profits before tax

13.2

30,1

17.9

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

14.8
11,8

14.7
7,8

3.0

2.2
7.1
14.1
6.8
7.4
3.0

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

5.7
4.0
4.2
6.0
6.3

4.3
3.0
3.1
4.5
4.5

7.9
11.9
10.7

9.4
9.2
10.3

7.7
8.1
5,4

24.2

45.7

35.0

6.5

14.4

8.7
-8.0

15.0
34.9

23.7
-4.1

5.9
7.4

16.4
3.8

9.6
6.7

3.6

2.8

4.5

4.4

3.1

2.7

2.1

4.6

2.6

6.9

5.3

2.8

2.0

8.5
-10.8
7.1
7.3
5.5

6.7
15.1
41.9
44.9
27.9

11.8
6.4
5.7
-0.5
44.1

8.8
-0.5
18.5
15.2
36.9

8.2
-44.0
-4.3
-0.9
-21.7

6.0
-16.1
-19.8
-9.8
-75.7

4.4
-29.3
-17.4
-20.0
0.0

1/ Excluding Federal pay increase, 5.8 per cent annual rate.
2/ Using expenditures in 1967 as weights.

8.0
9.4
11.3,1
6.67.4

CONFIDENTIAL - FR

June 13, 1973
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
Proj.
I

1974
Projection
II
III

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

98.9
-0.9
99.9
72.6
68.9
3.3
27.3

24.9
-2.5
27.4
18.7
17.2
1.5
8.6

21.4
-2.0
23.4
17.0
16.0
1.0
6.4

19.2
-1.5
20.7
14.9
14.9
0.0
5.8

19.5
-2.0
21.5
15.4
14.9
0.5
6.1

GNP in constant (1958) dollars
Final purchases
Private

21.4
21.2
16.7

4.0
5.7
4.7

3.2
4.5
3.3

2.4
3.1
2.2

2.3
3.2
2.4

--------- Per Cent Per Year--------------Gross National Product
Final purchases
Private

7.5
8.4
7.3

6.3
7.0
6.5

Personal consumption expenditures
Durable goods
Nondurable goods
Services

7.8
3.8
8.6
8.5

7.8
2.9
9.1
8.3

7.7
4.4
8.7
8.0

Gross private domestic investment
Residential construction
Business fixed investment

2.7
-11.4
9.1

-2.4
-13.2
8.1

-4.0
-16.7
5.3

9.9
6.4
3.6

12.1
13.1
10.7
18.1
11.7

8.7
4.2
1.6
9.8
11.6

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

12.2
12.3

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
2/
Private GNP fixed weight index

1.9
2.7
2.7
5.6 1/
4.8

1.5
2.1
1.9
4.8
4.8

Personal income
Wage and salary disbursements
Disposable income

8.9
8.8
9.5

6.9
6.9
7.5

5.6
6.1
5.6

5.6
6.2
5.7

-0.6
-6.3
5.2

-0.4
-1.6
5.2

Corporate profits before tax

5.0

4.6

-3.1

-6.2

-6.3

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

8.4
8.7

8.3
14.0

5.3
6.7

4.4
8.5

4.9
6.6

1.9
-0.5

1.6
-2.0

1.0
-2.0

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

3.1
-15.2
-13.0
-13.2
-11.8

2.2
-10.5
-9.1
-10.5
0.0

Excluding Federal pay increase, 4.8 per cent annual rate.

2/ Using expenditures in 1967 as weights.

1.6
-10.8
-18.6
-21.6
0.0

0.7
0.0
-29.3
-34.3
0.0

I - 8

Industrial production.

Industrial production rose 0.5 per

cent further in May and at 123.4 per cent of the 1967 average it was 9 per
cent above a year earlier.

Gains in output were widespread among con-

sumer goods, business equipment, and materials.
Auto assemblies continued at record levels and were at an
annual rate of 10.0 million units.

Production schedules for June and

the third quarter are also set at this 10 million unit rate.

Production

of some appliances, furniture, and consumer chemical and paper products
increased further.

Production of both industrial and commercial equip-

ment increased further but output of trucks remained at about capacity

levels.

Production of aircraft also was unchanged but at a reduced level.

Among materials, output of steel and other durable materials was maintained
at record levels while production of textiles, chemicals, and paper rose
further.
Retail sales.

Retail sales rose 1.4 per cent in May, according

to the advance report, but April sales have been revised to show a decline
of 2.4 per cent instead of 1.4 per cent first reported.

Altogether, retail

sales for May were only 0.6 per cent above the sharply advanced level of
the first quarter.

However, they were 12 per cent above May 1972.

I -9

INDUSTRIAL PRODUCTION
1967=100, seasonally adjusted

1972
May

March

1973
April

May

113.2

122.0

122.8

123.4

9.0

Consumer goods
Autos
Home goods
Apparel & staples

122.2
111.3
124.3
121.0

129.4
130.8
138.3
125.2

129.6
128.1
138.2
126.0

130.5
129.8
139.0
126.9

.7
1.3
.6
.7

6.8
16.6
11.8
4.9

Business equipment
Defense equipment

102.5
78.2

115.8
79.9

117.4
80.3

118.6
79.4

1.0
-1.1

15.7
1.5

Intermediate products

119.3

127.6

127.9

129.2

1.0

8.3

118.0

127.3

128.3

129.7

1.1

9.9

115.6
111.1
108.3
121.3

125.0
124.1
117.9
126.4

126.5
125.9
117.8
128.0

126.8
125.8
117.7
128.4

.2
-. 1
-. 1
.3

9.7
13.2
8.7
5.9

Total index

Construction products
Materials, total
Durable
Steel
Nondurable

Per cent change from
Month ago A year ago

Confidential until release June 15.

RETAIL SALES
(Seasonally adjusted, percentage change from previous period)

1972

1973
April

May

1.8

-2.4

1.4

1.4
2.3

-2.4
-2.4

1.6
1.8

- .8

2.0
.3

-2.4
1.3

1.3
.3

2.5

5.7

-6.1

3.0

4.7

1.4

1.8

-2.2

1.2

2.8

6.9

2 7

5,0

-6.7

3.0

2.7

3.8

-3.3

n.a,

Q IV

Q I

Feb.

2.6

3.7

5.7

1.3

Durable
Auto
Furniture and
appliance

3.9
4.6

5.4
6.0

8.2
7.8

1.2
.8

2.0

3,2

9.1

3.0

Nondurable
Food

1.9
1.7

2.8
1.7

4.4
3.7

1.4
- .8

General
merchandise

2.6

2.0

6.3

Total, less auto and
nonconsumption items

1.9

2.9

GAF

1.9

Total in constant prices

1.6

Q III

Total sales

March

- .3

Unit sales of consumer durables.

Sales of new domestic-

type autos were at a seasonally adjusted 10.1 million unit annual
rate in May, equaling the average of the first 5 months of 1973,

and a tenth above a year earlier.

Auto stocks at the end of May

continued low--at a 46 day supply, slightly below a month earlier
and 15 per cent below a year earlier
Foreign car sales in May were at a 1,9 million unit annual

rate, about the same as a month earlier and a fifth above a year ago.
The import share of total sales came to 15.7 per cent, moderately
above a year earlier.
In May, unit factory sales of major appliances, TVs, and
radios are estimated to have fallen slightly below April levels but
were about 14 per cent above a year ago.

Seasonally adjusted appli-

ances sales were down 1 per cent from April, with all 9 items in the
index equal to or below a month earlier.

A decline in color TV sales

in May was offset by an increase in monochrome sales.
continued to decline.

Radio sales

I - 11

UNIT SALES OF SELECTED CONSUMER DURABLE GOODS
Seasonally adjusted

Auto sales,
millions of cars
Domestic

Foreign

1972
May

March

1973
April

10.7
9.2

12.6
10.6

11.7
9,8

12.0
10.1

3
3

12
10

1.5

2,0

1.9

May

per cent change from
Month ago
Year ago

Home goods, factory
sales, 1967=100

133

150

153

152e

-1

TVs /
Radios 1/
Major appliances

131
88
138

154
96
153

158
81
157

158e
75e
155e

0
-7
-1

21
-15
12

e/ Estimated from data through May 26.
1/ Includes foreign-made units sold under domestic labels; foreign-label
units not included.
Consumer surveys.

The March-April Conference Board report

indicated a sharp drop in consumer optimism, but a surprisingly large
increase in plans to purrchase autos, major appliances and homes within
the next 6 months.

Among the attitudinal questions, evaluations of

business and employment conditions during the next 6 months showed the
most deterioration.

The proportions of favorable appraisals of

present business and employment conditions also declined from the
previous bimonthly survey, but were still well above a year earlier.
Income expectations drifted downward slightly for the third consecutive
quarterly survey.
In contrast, purchase plans for homes were at a record high
and plans to purchase autos recovered to the high level of the

I - 12

September-October survey.

(In apparent contradiction to the volume of

actual auto sales in recent quarters, buying plans for autos were
low in the Conference Board survey earlier this year.)

Purchase plans

for major appliances were up sharply from the previous survey to the
highest level in over a year.
The increased uneasiness about the future indicated in the
Conference Board survey is consistent with the more pessimistic trend

in attitudes continuously reported by the Michigan Survey Research
Center since last December.

In their second quarter survey covering

the April-May period, the index of sentiment declined another 4.8
points to the general level maintained during the 1970 recession.
Attitudes about the trend in personal financial situations and
expectations for business conditions during the next 12 months were
less favorable,

and there was also a slight decline in the number of

households who thought that it was "a good time to buy" household
durables.

Although this latter question is still at a relatively

high level and indicative of inflationary expectations, this is the
first indication that "buying in advance of price increases" might
become less important.

Michigan reported that appraisals of the

market condition for houses and autos turned down more than for household durables.

I - 13

CONFERENCE BOARD
CONSUMER EXPECTATIONS AND INTENTIONS
Seasonally adjusted

(Per cent)
1973

1972

MarchApril

NovemberDecember

JanuryFebruary

MarchApril

----- Appraisal of Present Situation----Business Conditions
Good
Bad
Employment
Jobs plentiful

Jobs not so plentiful

21.3
20.3

32.4
11.3

31.8
10.3

28.9
11.7

10.2

16.7

19.4

17.6

52.3

57.9

56.9

55.8

----Expectations for Six Months Hence-----Business Conditions
Better

19.8

25.9

24.9

22.1

7.4

6.5

9.0

More jobs

20.1

20.5

17.2

15.9

Fewer jobs
Income
Increase
Decrease

16.0

12.7

20.1

21.2

24.3
6.4

28.0
5.6

26.2
5.1

27.0
7.4

Worse
Employment

10.1

----- Plans to Buy Within Six Months-------Automobile
Yes

New
Home
Yes
Major appliances

Total plans

7.3

8.1

9.2

4.3

5.1

5.0

5.5

3.7

3.5

3.1

4.4

32.8

34.3

30.9

37.5

I - 14
Construction and real estate.

Seasonally adjusted value of

new construction put in place changed little in May from the revised
April level, and was just below the peak which apparently was passed
in March.

Outlays for private residential construction dipped for

the second successive month.

Among the other major groups, only

outlays for private nonresidential construction were holding at
earlier highs.

NEW CONSTRUCTION PUT IN PLACE
billions of dollars)

(Seasonally adjusted annual rates, in

1972

Per cent change
in May from:
April 1973
May 1972

QIV(r)

QI(r)

May I/

129.0

135.3

135.2

+ 10

97.4

102.2

102.3

+ 10

57.0
40.4

59.0
43.2

58.8
43.6

+ 11
+ 9

31.6

33.2

32.9

+10

State and local
Federal

27.2
4.4

28.0
5.2

28.1
4.8

-+5

+ 11
+ 7

Total-1967 dollars

90.4

93.4

91.6

Total-current dollars
Private
Residential
Nonresidential
Public

1973

Data for May 1973 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.
Rising construction costs have continued to be an important
factor in

the level of current dollar outlays this year.

composite cost index continued to edge upward -the 1967 average.

In May, the

to 148 per cent of

On a year-to-year basis, the increase amounted to

I - 15

8 per cent as compared with an upward revised increase of about 7
per cent--year-over-year--in the first quarter as well as in 1972 as
a whole.
Seasonally adjusted private housing starts dropped 6 per
cent further in April to an annual rate of 2.10 million units.
recovery in starts may have occurred in May.

Some

Even so, the accelerated

downtrend in residential building permits and other factors indicate
a second quarter average appreciably under the near-record rate of
2,40 million units in the first quarter, with starts of both singleand multifamily units declining.

Meanwhile residential completions,

which lag starts, have continued to rise.

PRIVATE HOUSING PERMITS, STARTS AND COMPLETIONS
(Seasonally adjusted annual rates, in millions of units)

QI(r)

Permits

2,24

2.16

2.07

1.79

- 15

- 10

Starts

2.40

2.25

2.10

-6

1,28
1.12

1.36
1.04

1.25

1,19
.91

-4

1.00

-9

2.02

2.10

2.12

n.a.

.61

.68

1-family
2-or more-family
Completions

1973

Per cent change
in April from:
Mo. ago Year ago

1972
QIV

March(r)

April(p)

(+ 4)/

(+
(+

7
7)

Memorandum:
Mobile home shipments

. 74

p/ Preliminary.
n.a. Not available.
Per cent changes shown based on March 1973.
1/

.68

I - 16

New capital spending plans.

The Commerce May survey of

planned spending for new plant and equipment indicates an increase of
13.2 per cent for 1973--down slightly from the Commerce March survey
and substantially below the 19 per cent rise reported in the McGraw-Hill
spring survey.

The downward revision in 1973 spending plans from the

March Commerce survey results from a shortfall of $0.5 billion of actual
from planned spending in the first quarter and a scaling down of planned
spending in the second quarter.

EXPENDITURES FOR NEW PLANT AND

EQUIPMENT BY U.S. BUSINESS
(Per cent change from prior year)
1973
1971
1971

McGraw-Hill
(Nov.
(May
1973)
1972)

1972
1972

(Jan.
1973)

Commerce
(Mar.
1973)

(May
1973)

------------ Anticipated---------------

All Business

1.9

Manufacturing
Durable goods
Nondurable goods

Nonmanufacturing
Transportation
Electric utilities

8.9

10.6

19.3

12.9

13.8

13.2

-6.1

4.5

13.8

29.2

13.6

18.1

18.5

-10.4
-1.9

10.5
- .8

15.3
12.3

38.1
20.2

16.7
10.6

19.6
16.5

21.7
15.4

7.2
-18.4

11.5
16.0

8.9
-6.7

13.9
8.9

12.5
1.6

11.4
-2.4

10.3
.7

20.8

12.6

13.0

16.0

17.0,

16.5

14.9

Communication

6.6

10.4

9.0

14.0

17.6 -/

12.8

10.5

Commercial and other

8.8

11.2

10.0

14.0

10.4

7.9

9.8

Confidential, not published separately.
The first quarter shortfall occurred in nonmanufacturing and
in nondurable goods manufacturing, while spending by durable goods producers just matched plans.

Second quarter plans have been revised down-

ward substantially--mainly in nonmanufacturing.

There are differences

in compilation that may account for some of the apparent disparity

I - 17

between the Commerce and McGraw-Hill surveys.

It appears, however, that

this latest Commerce survey may prove to have underestimated somewhat
the strength of business capital spending, especially in manufacturing.
New orders for capital goods have been quite strong and unfilled orders
are rising.

Also, newly approved capital appropriations rose 15.5

per cent in the first quarter according to the Conference Board,
supporting the reports of continued strong spending plans by manufacturing
firms.

(Historically, appropriations tend to be spent in about two to

three quarters.)

Excluding the volatile petroleum industry, the first

quarter rise was 21.7 per cent.

Backlogs of unspent appropriations also

rose sharply in the first quarter and could now support spending at
the first quarter rate for another four quarters.
Manufacturers orders and shipments.

New orders for durable

goods declined 1.5 per cent in April (p) following a 5.6 per cent rise
in March.
average.

The April level was 2.7 per cent above the first quarter
Nondefense capital goods orders edged off slightly in April

and primary metals orders--mostly for steel--fell by 7.8 per cent after
rising 12.7 per cent in March.
Shipments of durable goods were up sharplyiin April, and
backlogs of unfilled orders continued to increase rapidly, suggesting
further strength in investment.

I - 18

MANUFACTURERS NEW ORDRS FOR DURABLE GOODS
(Per cent changes)

1972
Q IV from

Q I from

1973
March from

Q III

Q IV 1972

February

4.6
4.8

8.8
8.5

5.6
5.2

Primary metals
Motor vehicles and parts
Household durables

2.1
4.0
5.6

15.7
9.7
5.2

12.7
-2.1
- .8

-7.8
.7
5.3

Capital goods industries
Nondefense
Defense

5.2
6.1
.2

7.8
6.3
16.1

9.8
8.8
14.8

- .8
-1.2
.9

Constructions & other durables

5.4

6.9

3.3

Durable goods total
Excluding defense

April from
March (p)
-1.5
-1.6

-1.2

I - 19
Inventories.

Book value of business inventories rose at an

$8.7 billion annual rate in April (p), down sharply from the firstquarter average rate of $22.2 billion. The decline from the first
quarter results mainly from a negligible April rate of book value
growth at manufacturing.

The April manufacturing figure may reflect

some involuntary decumulation, resulting from continued rapid growth
in sales, but it also appears in part to result from a seasonal
adjustment problem, suggesting that May could well show a resumption
of book value growth at manufacturing.
CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)
1973

1972

March

April
(Prel.)

Q IV

(Rev.)

Manufacturing and trade

14.9

22.2

18.3

8.7

Manufacturing, total
Durable

6.4
5.2

10,2
7.2

14.1
9.9

0
2.1

Nondurable

1.2

3.0

4.2

-2.0

Trade, total
Wholesale

8.5
4.3

12.0
6.1

4.2
2.3

8.6
2.5

4.2

6.0

1.9

6.1

Retail

NOTE:

Detail may not add to totals because of rounding.
The inventory-sales ratio for manufacturing and trade

remained at a low 1.41 in April. There was a rise in the retail
ratio, reflecting the April decline in retail sales, but a further

I - 20

decline in the manufacturing ratio.

The ratio of inventories to

unfilled orders at durable goods manufacturing ratio. The ratio of
inventories to unfilled orders at durable goods manufacturers dropped
further.
INVENTORY RATIOS
1973
1972

March

April

(Prel.)

March

April

(Rev.)

Manufacturing and trade

1.53

1.52

1.41

Manufacturing, total
Durable

1.70
2.04

1.67
1.98

1.56
1.86

1.54
1.83

Nondurable

1.30

1.20

1.18

Trade, total
Wholesale
Retail

1.36
1.22
1.44

1.36
1.22
1.46

1.25
1.13
1.34

1.28
1.13
1.38

.931

.925

.817

.798

Inventories to sales:

Inventories to unfilled orders:

Durable manufacturing

Cyclical indicators.

The preliminary Census composite

index of leading indicators declined 0.6 per cent in April, following
21 straight months of increase at an average monthly rate of more than
1 per cent.

The coincident and lagging indexes increased.

The leading index is usually somewhat irregular, so that it
is quite possible that April's mild decline will be reversed when
later data become available.

Even if March turns out to have been a

I - 21

peak, such a peak--based on past performance--could foreshadow changes
in the economy ranging from a mild slowdown to a full-fledged recession.

CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from previous month)

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

Jan.

Feb.

Mar.

1.9

1.8

1.6

- .6

1.5
1.3
.9
1.7

1.4
1.3
.8
2.3

1.3
1.1
.5
1.0

- .9
.8
.5
2.2

Apr.

(p)

Leading series decreasing in April were initial claims for
unemployment insurance (inverted), new orders for durable goods,
contracts and orders for plant and equipment, housing permits, common
stock prices, and the ratio of price to unit labor cost.

Series

increasing were the manufacturing workweek and industrial materials
prices.
Since the preliminary April index was compiled, new orders
and contracts and orders have been revised upwards somewhat, but a
decrease was reported in the change in consumer installment debt.
In May, common stock prices and the workweek declined while
industrial materials prices rose further.
Labor market.

Growth of employment has moderated in the

past two months following an exceptionally rapid increase which began

I - 22
in mid-1971.

Total employment and the labor force changed relatively

little in May and the unemployment rate remained at 5 per cent, where
it has held since the start of the year.

Insured unemployment and

initial claims for unemployment compensation also have leveled off
since early this year.
Preliminary payroll employment estimates for May show an
increase of 150,000 following a similar gain in April. This compares
with an average monthly increase of about 285,000 in the preceding
ten months.

The recent slowing has appeared in all sectors except

construction and State and local government. The number of manufacturing jobs in May was little changed, following virtually continuous
growth from December 1971 to April 1973.

The factory workweek fell

0.2 hour to 40.8 hours in May, mainly reflecting a sharp cutback in
overtime at transportation equipment producers and widespread
reductions in hours in nondurable goods industries.

I - 23

CHANGES IN NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)

May 1972-March
May 1972May 1972May 1973*
March 1973
Total

2,691

Private
Goods producing
Manufacturing
Construction
Service producing
Trade
Services

2,302
952
872
85
1,350
591
510

Government

Federal
State and local
*

Annual rate
2,856

2,483
1,027
935
86
1,456
647
557

389
34
423

373
-

414

1973March 1973May 1973
1,848
1,416
600
582
78
816
324
258
432
0
432

Based on not seasonally adjusted data.

Unemployment. The over-all unemployment rate remained unchanged

in May, and there was also little or no change among most major labor
force groups.

Over the past year, however, the number of unemployed

persons has decreased by 550,000.

All of the decline has been among

persons who lost their jobs--a typical cyclical pattern--while the
number unemployed for other reasons (i.e. labor force entrants, reentrants, and job leavers) has remained the same.

Job losers comprise

about 36 per cent of all unemployed in May, as compared with 43 per cent
a year ago.

I - 24
ECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

Total
Men 20 years and over
Women 20 years and over
Teenagers
Household heads
White
Negro and other races
White-collar
Blue-collar

Earnings.
in

1973
1973
April

1972
May

January

5.8

5.0

4.1
5.7
15.7

3.3
5.3
14.3

4.7

3.4
15.4

May
5.0
3.4
4.6
15.4

3.5

2.9

3.0

2.9

5.2
10.3

4. 6
8.9

4.5
9.1

4.4
9.4

3.5
6.7

3.2
5.6

3.1
5.4

2.8

5.4

The index of hourly earnings of production workers

the private nonfarm economy rose at a 3.2 per cent annual rate in

May, after larger increases in March and April.

The index, which tends

to move unevenly on a monthly basis, was up by 5.7 per cent over the
year ending in May but has risen at a slightly slower rate over the
past six months.

Virtually all of the slowing has occurred in the

heavily unionized construction and transportation and public utilities
categories and may partially reflect the irregular timing of contract
settlements.

In manufacturing,

as well as in

the relatively less

unionized trade and service sectors, there has been some speed-up in

the rate of earning

increases in the past six months.

I - 25

HOURLY EARNINGS INDEX*
(Per cent change; seasonally adjusted,
May 1971May 1972
Total
Manufacturing
Construction
Transportation
Trade
Services

May 1972May 1973

annual rate)

May 1972Nov. 1972

Nov. 1972May 1973

6.1

5.7

5.9

5.4

6.2
6.6
10.4

5.4
5.4
7.8

5.2
5.9
10.2

5.6
4.9
5.4

4.5
5.3

5.8
5.4

5.5
5.1

6.0
5.7

*Average hourly earnings adjusted for inter-industry shifts and, in
manufacturing only, for overtime hours.

Industrial productivity and labor costs. Although in-

dustrial production continued to rise in April and May, gains in
industrial productivity have slowed, and with continuing strong
increases in labor compensation there have been further increases

in industrial unit labor costs.

The latter rose at an annual

average rate of about 6.5 per cent, as compensation per manhour
increased at a rate of over 8 per cent and estimated industrial
productivity gains were at a rate of about 1.7 per cent.

Compared

with the same period a year ago, labor costs in April-May were up
4.0 per cent with compensation up about 8 per cent and productivity
3.8 per cent.
INDUSTRIAL PRODUCTIVITY AND LABOR COSTS 1/

1973

1972

Series
QII

QIII

QIV

Apr.-May

Per cent change from previous quarter at

annual rate
Output per manhour
Compensation per manhour
Unit labor costs

4.5
5,7
1.4

5.6
5.9
.7

4.4
8.5
3.8

2.6r
10.5r
8.lr

1,7 =
8.3
6.5

Per cent change over previous year
Output per manhour
Compensation per manhour
Unit labor costs

3.3
5.7
2.7

4.1
6.5
2.0

4.9
7.3
2.8

4,4r
8.Or
3.5r

3,8
8,0
4,0

1/FRB estimates.For a description of these series see the "Supplement to Current
Economic and Financial Conditions," April 13, 1973.
2/Per cent change from previous 2-month period at annual rate.

I - 27
Minimum wage.

The House passed a minimum wage bill June 6

which would raise the nonfarm minimum to $2.20 an hour by 1975, extend
coverage to about 5 million government employees and 1 million domestic
workers, and bring farm workers' minimum wages into parity with nonagricultural employees over the next four years.

The legislation

provides increases for those covered by the Fair Labor Standards Act
before 1966 from $1.60 an hour to $2.00 an hour, effective when signed
into law, and to $2.20 an hour in 1974.

For those workers covered by

the 1966 FLSA amendments and those newly covered by the Act, the minimum
wage would increase to $1.80 an hour this year, $2.00 an hour next year,
and $2.20 in 1975.
The House bill does not provide the youth differential wage
which the Administration had recommended and still desires, but would
authorize wages for full time students below the hourly minimum--a
provision considerably milder than sought by the Administration.

The

package is estimated by the Labor Department to add directly about $1.5
billion to the wage bill this year, about $1.7 billion next year, $0.7
billion in 1975 and $0.3 billion in 1976.

It is also likely to have

repercussions on wage rates above the minimum wage.
In the Senate, hearings began last week on minimum wage
legislation.

Although two bills have been introduced, one by Senator

Dominick and one by the Chairman of the Senate Labor Committee, Senator
Williams, the final Senate version is expected to resemble closely the

I - 28

Williams version.

This measure is very similar to the House-passed

bill in extensions of coverage and increases in the statutory minimum,
and thus in cost.

Last year the Senate passed a bill similar to that

introduced this year by Senator Williams.

I - 29

Industrial relations.

General Electric and the two major

electrical workers' unions reached tentative agreement on a new
contract covering about 100,000 workers.
for a membership vote shortly.

This agreement is scheduled

Negotiations between the unions and

Westinghouse continue on a day to day basis.
The General Electric settlement could provide an increase in
wages of up to 88 cents, or 22 per cent, over the life of the three
year contract, depending on cost-of-living adjustments.
wage adjustments will total about 7.5 per cent

First year

a 6.3 per cent increase

retroactive to May 28 and a 1.2 per cent cost-of-living raise guaranteed
on November 26, 1973.

In the second and third contract years the

workers could receive up to 7.0 per cent and 6.1 per cent, respectively
in wage increases.

The contract provides a maximum of 14 cents an hour

in cost-of-living adjustments in the second contract year, of which
10 cents an hour is guaranteed,

and there is a 12 cents an hour cap

(maximum) on cost-of-living raises in the third year.

The escalator

formula provides a 1 cent an hour raise for each 0.3 per cent rise
in the Consumer Price Index.

Thus, the maximum payment would require

at least a 4.2 per cent rise in the CPI during the second contract year
and at least a 3.6 per cent increase in the third year.
New fringe benefits provided under the new agreement include
increased pension benefits, retirement at age 62
unemployment compensation.
yet available.

and supplemental

The estimated cost of these benefits is not

I - 30

G. E. SETTLEMENT
(Cents per hour)

Wage
adjustment

Guaranteed

Possible

cost of living

Maximum
total

1973

.15

.30

7.5

1974

.16

.10

.14

.30

7.0

1975

.16

.12

.28

6.1

Total

.88

In other industrial relations developments

Per

cent

20.6

the United

Rubber Workers ended a three week strike against B. F. Goodrich by
ratifying a new three year contract June 3.

The settlement provides

wage increases identical to the moderate increases in the Goodyear
contract which was ratified last month but it differs in providing a
larger increase in fringe benefits.

Specifically

the Goodrich

settlement increases pensions for those retiring in the first contract
year from $7.75 to

$9.50 a month for each year of service, to $9.75 a

month for those retiring in the second contract year
third year.

and to $10 in the

Goodyear had agreed to an increase of 75 cents to $8.50

for all three years of the contract.

The Goodrich agreement also offers

early retirement at age 55 after 30 years of service, but unlike
Goodyear, the Goodrich settlement does not reduce pension benefits
for early retirees.

I - 31

Consumer prices.

Consumer prices climbed further in April--

at a seasonally adjusted annual rate of nearly 8 per cent--to a level
about 5 per cent above

April 1972.

Food prices continued to rise

extremely rapidly while advances for other commodities accelerated
to an annual rate of 5 per cent.

Service costs continued to increase

at the first quarter rate.

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

Relative

Addendum:
All items less mortgage
costs 2 /
Services less home
financel/ 2/ 3/
Commodities less food,
used cars home
purchasel3
1/
2/

1972

March

June

June 1972

Dec.

March 1973

April

100.0

2.9

3.9

8.6

7.8

22.5
40.1
37.4

3.3
2.6
3.7

6.3
2.5
3.5

28.6
4.0
3.6

18.4
5.0
3.6

96.3

3.0

3.9

8.5

9.7

30.9

3.5

3.1

4.0

4.6

31.8

2.1

2.0

4.1

7.2

Dec

Food
Commodities less food
Services-/

Dec.

Dec. 1971

Importance

All items

1973

1972

Relative

1972

Not seasonally adjusted.
Home financing costs excluded from services reflect property taxes and
insurance rates as well as mortgage costs, which in turn move with
mortgage interest rates and house prices.

3/ Confidential.

I - 32

A further large increase in meat prices

although less

spectacular than in previous months, contributed to the climb in food
costs as did substantial advances for most food groups, particularly
fresh fruits and vegetables and eggs.

Retail food prices in May may

rise more moderately, in view of the small increase that month at
wholesale.

In the following months, although meat prices will be restrained

by ceiling levels further substantial advances are likely for many other
foods including eggs
products

processed fruits and vegetables, coffee, bakery

and perhaps broilers.
The acceleration of price rises for other commodities is

seen more clearly in the series excluding used cars and home purchase,
this series has increased since January at a rate of about 6 per cent
compared with 2 per cent during 1972.

Apparel and gasoline were of

major importance in the recent advance, and household durables and new

cars rose substantially in April.
Among services, rents were up less in April than in the
previous three months but this was offset by larger increases for
medical and other service costs.

When costs associated with home-

ownership--mainly mortgage interest and property taxes--are excluded
from services, the rate of rise since January shows a marked acceleration
to 4.6 per cent, in contrast to 3.3 per cent during 1972.

This

reflects the recent advances in rents as well as a faster rise in most
other services.

I - 33

Wholesale prices,

Wholesale prices rose 2 per cent between

April and May or 27.5 per cent at a seasonally adjusted annual rate.
Price increases were widespread as prices for farm and food products
rose sharply after slowing in April, and prices of industrial com-

modities continued to rise at a very rapid pace for the fourth consecutive month.

In the first four months of Phase III, the WPI increased

more than three times as fast as in Phase II.
WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)

All commodities
Farm products 1/
Industrial commodities

Phase II

Phase III

Nov. 1971
to

Jan. 1973
to

Jan. 1973

May 1973

6.9

22.8

16.1

43.2

3.5

14.9

1/ Farm products and processed foods and feeds.
In May the index of farm and food products increased 4.1
per cent, 62.3 per cent at a seasonally adjusted annual rate, as

sharply higher prices were posted for manufactured animal feeds,

I - 34

soybeans, grains, cotton, fluid milk, and fats and oils.

Declines

were few, but included somewhat lower prices for meat, poultry, and
dairy products.
Prices of industrial commodities rose 1.2 per cent, 15.5 per
cent at a seasonally adjusted rate.

Of major influence were increases

for fuels and electric power, metals and metal products,
wood products,

machinery,

and textile products.

lumber and

Since mid-May,

the

BLS raw industrial materials index has continued to move higher with
prices of scrap metals and raw cotton and wool tops of particular
importance.

Some strengthening, perhaps temporary, in prices of lumber

and plywood products has been noted recently, but prices are not
expected to return to their recent peaks.

The increase in prices of

steel sheet and strip expected by producers to be effective in mid-June,
if permitted by the Cost of Living Council, will be reflected in the
July WPI.

A major producer of copper has increased its price and

another has requested approval of a sizable price increase.
Although the increase in consumer foods last month was the
smallest in about a year, other consumer goods continued to rise at a
high rate, reflecting advances for heating fuel, apparel, gasoline,
passenger cars, jewelry, and carpets.
Producer finished goods rose at a rapid rate for the fourth
consecutive month, reflecting higher seasonally adjusted prices for
machinery and equipment, metal commercial furniture, and motor vehicles.

I - 35

WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)

June
to
Sept.

1972
Sept.
to
Dec.

1973
March
Dec. 1972
to
to
May
March 1973

April
to
May

All commodities

7.2

9.4

21.1

19.7

27.5

Farm products

19.2

27.7

51.9

27.9

62.3

Industrial commodities
Crude materials
Intermediate materials
Finished goods
Producer
Consumer
Consumer finished foods

Note:

3.4

2.4

10.2

16.2

15.5

10.6
3.1
3.2
2.4
3.6

14.2
4.1
- .1
- 1.0
.4

11.8
12.4
6.4
4.7
7.2

33.1
15.9
13.3
8.2
15.9

33.2
15.2
12.0
8.1
14.0

11.8

13.2

44.2

10.3

3.4

Farm products include farm products and processed foods and
feeds. Crude materials exclude crude foodstuffs and feedstuffs,
plant and animal fibers, oilseeds, and leaf tobacco and inter-

mediate materials exclude intermediate materials for food
manufacturing and manufactured animal feeds. Data for the
finished goods total are estimated and exclude foods. Consumer
finished foods are foods in their final state ready for use by
consumers and include some commodities in the farm products
group and most commodities in the group for processed foods and

feeds.

I - 36

Agriculture.

After substantial increases during the month

ending May 15, prices of cattle, corn and soybeans have continued their
rise into early June, and eggs, broilers, hogs and wheat have also
turned upward.

During the first week in June, prices of the major feed

items, corn and soybeans, reached levels two and three times those in

November 1972.
High prices of feedstuff result from heavy demand, limited
stocks, and prospects for a continued tight situation, at least for
corn, in the new crop year.

With planting not quite complete, an

early estimate of corn production is 5.9 million bushels, 7 per cent
above last year but 5 per cent less than had been hoped for earlier.
If no further delays occur in soybean planting, now half complete, the
crop may be relatively ample at 1.5 million bushels, 11 per cent above
last year.

Harvest of the excellent winter wheat crop has begun and
production is expected to be 11 per cent above last year.
the new crop will probably be as large as

Exports of

the 1972 crop; world demand

is likely to keep prices strong.
Red meat production increased moderately in May from the
sharp boycott-associated April decline.

But output was still 6 per cent

below the January-March level reflecting partly large winter death
losses of cattle and pigs.

Slaughter volume is running below expecta-

tions based on recent surveys of the livestock numbers on farms and feedlots, so there has been increased doubt concerning the validity of the
survey data.

In addition to the reduced volume of red meat production,

supplies of broilers, eggs, and milk are below the levels of last year
and are not expected to expand until the feed supply and price situation
improves.

I - 37

Farm land values and farm credit.

New data from the Department

of Agriculture have underscored the boom in farm land prices and transfer
activity.

The national index of farm real estate prices on March 1 was

13 per cent higher than a year earlier (confidential until publication
about June 18), sharply above the average annual gain of 5.8 per cent
during the preceding 10 years.

Price strength was widespread, with

only four states showing increases of less than 10 per cent.
The total value of farm land transferred in the year ending
March 1, 1973 was $10.6 billion, far above the former record of $6.8
billion set the preceding year.

Eighty-six per cent of the transfers

involved credit financing, and in these sales the debt averaged 78 per
cent of purchase price--both new highs for these series.

(Confidential

until publication in late July.)
Department of Agriculture analysts state that the land boom
reflects several factors:

rising farm income since 1970; readily

available mortgage credit, particularly from Federal Land Banks, at
stable interest rates; and the accelerated movement of land into nonfarm
recreation and housing uses.

Of the farm real estate brokers, bankers,

and other reporters surveyed on March 1, 71 per cent expected price
increases exceeding 5 per cent during the next 12 months, compared to
48 per cent a year earlier.
Demand for farm production loans has been strong this spring,
as expected in view of the Department of Agriculture estimate that
farm production expenses will be $6 billion, or 12 per cent, higher than

I - 38

in 1972.

Through April, new loans at production credit associations were

running 24 per cent above last year; however,

repayments have continued

strong, and outstanding volume on May 1 was only 9 per cent above a
year earlier.

Loans at rural banks are also up,

but these banks generally

continue in a relatively liquid position as rising farm income has
swelled deposits.

DOMESTIC FINANCIAL
SITUATION

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

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1
M2
M3
Time and savings deposits
(Less CDs)
CDs (dollar change in billions)

Treasury bill (90 day)
Commercial paper (90-119 day)

May

32.4
30.1

wk.

endg.

1 day

FNMA auction yield (FHA/Va)
Dividends/price ratio (Common
wk. endg.
stocks)
end of day
NYSE index (12/31/65=50)

Total of above credits
e - Estimated

3.7
8.0

May

10.7
9.9
8.8
8.6

May
May
May

61.7
311.2
600.0

3.0
7.0
22.6

6/6/73
6/6/73
6/6/73
6/8/73
6/7/73
5/31/73
5/30/73
6/11/73

Year
ago

Three
months ago

SAAR (per cent)
9.5
10.9

8.2
10.1
6.9
9.1
10.9
11.2

5.9
7.6
9.7
9.1

24.9

12.9
8.9
16.1

14.2

15.7

Percentage or index points
1.41
1.00
8.43
7.03
0.79
1.20
7.68
1.28
0.55
7.64

5.13
8.00

0.03
0.08

-0.06
0.27

3.95
3.17
3.20
0.37
-0.18
0.37

3.02
56.13

0.06
-1.30

0.16
-4.89

0.19
-3.27

Net change or gross offerings
Current month
Year to date
1973
1972
1972
1973

Credit demands

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

Month
ago

260.5
540.6
851.8
280.0

May

New utility issue Aaa

Municipal bonds (Bond Buyer)

Level

May
May

(end of month)

Market yields and stock prices
Federal funds

Period

May

Savings flows (S&Ls + MSBs)
Bank credit

Net change from

Latest data

Indicator

May

3.1

1.3

17.9

5.7

April
March
March

1.4
5.2
1.3

1.0
4.2
1.7

7.4
12.7
2.9

4.3
10.2
5.4

March
June
June

2.4
1.1
-2.6e

2.2
0.6
-3.4

11.9

7.6

5.8
6.8
2.0e
55.5

6.0
1.9
-2.2
31.3

- 1

DOMESTIC FINANCIAL SITUATION
Short-term interest rates have been under considerable upward
pressure since the last Committee meeting, largely in reflection of
recent monetary policy actions.

Treasury bill rates have shown the

largest increases as the supply of bills to be absorbed by nonbank
investors has been augmented by Federal Reserve operations, foreign
central bank activity, and commercial bank liquidation of bills in
order to meet loan demands.

With private short-term credit demands

remaining strong, other short-term market rates -- including the
prime rate -- have increased about 50 basis points in the intra-meeting
period.
In longer-term markets corporate bond rates have risen 25
basis points, while yields on tax exempts have been essentially

unchanged.

In May, yields on home mortgages in the primary market

edged higher, with reports of reduced credit availability and more
restrictive commitment policies associated with continued reduced
deposit inflows to nonbank thrift institutions.

Yields in the FNMA

auction of FHA/VA loans have been rising steadily since the first of
the year, advancing about 35 basis points over this period.
Bank credit during May expanded rapidly, with all loan
categories strong.

Despite the cessation of run-offs of dealer

placed commercial paper by nonfinancial corporations, business loan
expansion continued to be quite rapid.

II - 2

Outlook.

The near-term outlook for interest rates depends

importantly on the content of any new Administration initiative in the
wage-price area.

Over the longer-run, though with nominal GNP growth

continuing to be relatively strong as projected, interest rates are
expected to be under further upward pressure, assuming moderate growth
in the monetary aggregate.
The spread between the bill rate and the Federal funds rate
is still

quite large, despite sharp increases in the bill rate in

recent weeks, suggesting further increases ahead.

Early in the summer,

when the Treasury is not expected to be a significant factor in the
market, bill rate increases could once again be moderated by a relatively
scarce supply of bills.

But borrowing by housing and other agencies

and Treasury asset sales are expected to be sizable.

Private credit

demands in short-term markets are also expected to be strong, and CD
and commercial paper rates --

as well as the bank prime rate --

seem

likely to remain under upward pressure.
Longer-term market rates have continued to fluctuate in a

quite narrow range despite increases of 2 to 3 percentage points in
money market rates in the last six months.

During this period, cor-

porations have relied heavily on short-term sources of credit and
their own cash flows to finance their activities.

No significant

shift in financing patterns are apparent at this time, but there are
reports that some investment nankers have been counseling corporations

- 3

to accelerate their planned capital market borrowings on the expectation that fundamental economic factors are leading toward higher
long-term rates.
There have been some indications of commercial bank efforts
to limit loan expansion and some unconfirmed reports that borrowers
who shifted their financing from the commercial paper market to banks
in the spring are being asked, as these loans mature, to pay them down.
Such policies would bring upward rate pressures on the commercial paper
market and -- to the extent that they contribute to a shift toward
capital market financing -- on longer-term rates as well.
Residential mortgage activity is likely to continue to moderate

in line with the reduced inflow of funds to thrift institutions -assuming no change in the regulatory ceiling on deposit rates.

Savings

and loan association borrowing from the Federal Home Loan Banks --

already large -- is expected to rise further this summer,

contributing

to sustained borrowing by that Agency at a time when borrowing by FNMA
and other housing credit agencies is also expected to remain large.

this environment,

the combination of State usury and FHA/VA rate

ceilings can be expected to result in

a step-up in

rationing of new residential mortgage credit.

the non-price

CID restraints are also

working in that direction, at least insofar as banks are concerned.

Monetary aggregates.

- 4

Preliminary data indicate that M1 increased

at a 10.7 per cent annual rate in May, bringing the growth rate for the
April-May period close to that of the fourth quarter of 1972.

Some acceler-

ation in M1 growth was to be expected in the second quarter in light of
the continued strong pace of economic activity and the unusually slow
growth in the first quarter.

In April and May, however, large income

tax refunds may have contributed temporarily to the more rapid growth of
demand balances.
annual rate.

Growth in M2 accelerated in May to about a 10 per cent

While this acceleration reflected solely the faster growth

in M1, inflows of time deposits other than large CD's have remained surprisingly strong despite increasingly higher yields available on competing
market instruments.
The larger M2 growth in May than in April was offset by a
smaller increase in net sales of negotiable CD's and a decline in U.S.
Government deposits, seasonally adjusted; as a result, the adjusted bank
credit proxy slowed to an 11.5 per cent annual rate of growth.
The $3 billion increase in net sales of CD's in May was almost
$1 billion below the average increase over the preceding four months.
This slower growth apparently reflected both the larger volume of maturing
CD's and the reluctance of some banks to pay the increasingly higher costs

needed to sustain the net inflows at the rapid pace of previous months.
Even though banks were free to bid for longer-term CD's after suspension
of the ceilings on May 16--and the offering rates on such instruments

increased 25 to 75 basis points from their below-market levels--prelim-inary data suggest that the average maturity of CD's sold over the entire
month remained essentially unchanged from that in April.

II - 5

MONETARY AGGREGATES
(Seasonally adjusted changes)

1972
QIV
QIII

Mar.

1973
Apr.

May P

Per cent at annual rates
M 1 (Currency plus private
demand deposits)
M2 (M1 plus commercial bank
time and savings deposits
other than large CD's)

8,2

8.6

1.7

10.3

10.2

12.4

7.5

10.7

5.7

4.8

8.1

9.8

11.5

8.6

6.9

8.4

8.8

9.8

12.1

15.0

19.7

13.1

11.5

M 3 (M2 plus savings deposits

at mutual savings banks
and S&L's)
Adjusted bank credit proxy
Time and savings deposits
at commercial banks
a.

Total

14.0

14.4

23.1

30.9

21.0

18.2

Other than large
CD's

12.3

11.6

9.5

9.6

8.7

8.6

Billions of dollars 1/

Memorandum:
a.

U.S. Government demand
deposits

* .4

-1.6

-1.2

Negotiable CD's

1.1

3.9

6.1

3.8

3.0

Nondeposit sources of
funds

p - Preliminary and partially estimated.
1/ Month-to-month change in levels or monthly averages of last-month-inquarter to last-month-in-quarter changes, not annualized.

II - 6
As growth in CD's decelerated in May, banks obtained additional funds by liquidating $1 billion in Treasury security holdings.

They also raised approximately $300 million from non-deposit sources-primarily through issuance of bank related commercial paper, but also
through increased Eurodollar borrowings.

Since the beginning of the

year, however, funds obtained from non-deposit sources have increased
by only $1 billion, as rate differentials have made these funds generally
more expensive than funds acquired through CD sales.
Bank credit.

Following moderate growth in April, total loans

and investments of commercial banks (last Wednesday-of-the-month series,
seasonally adjusted) expanded at a 22 per cent annual rate in May, above
the very strong first quarter pace.

Most of the increase in bank credit

reflected a sharp expansion in loans, although, for the first time this
year, there was also a sizable increase in bank holdings of "other"
securities, primarily State and local tax warrants and agency issues
acquired late in the month.

The increase in "other" securities was

partially offset by a large reduction in bank portfolios of Treasury
securities.
A sharp expansion in loans to non-bank financial institutions
in May in part reflected increased borrowing by finance companies, apparently induced by both the favorable spread between bank rates and commercial
paper rates and the high level of consumer credit demands.

At the same

time, finance companies continued to add substantially to the volume of
their directly-placed commercial paper outstanding.

Borrowings at banks

by other non-bank financial institutions, which have been extremely
high all year, showed another large gain in May.

In a special Reserve

II - 7

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

1972 3/
QIV

1973 3/
April

May

Total loans and
investments 2/

16.4 (17.0)

18.4

6.4 (4.9)

22.6 (21.8)

U.S. Treasury
securities

2.6

-11.6

Other securities

12.0

1.0

Total loans 2/

20.3 (21.2)

Business loans 2/
Real estate loans
Consumer loans

-19.8

-6.1

21.6

28.6

10.6 (8.5)

29,4 (28.3)

15.5
19.2

39.1
15.9

21.7
12.9

24,6
17.5

19.0

17.6

9.8

13.0

1/ Last-Wednesday-of-month series.
2/ Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries, a
foreign branches.
3/ Data revised on basis of December 31, 1972, Call Report. Details
of revision will be available in Supplement.
Note:

Data in parentheses are adjusted to exclude System matched salepurchase transactions.

II - 8
Bank survey, several large commercial banks indicated that real estate
investment trusts had been drawing more heavily on bank lines of
credit rather than using commercial paper because of relative rate
considerations.

Also, some respondents reported an increase in

short-term credit to mortgage companies to finance increased inventories.

Only a few banks reported that savings and loan associations

had increased their bank borrowing as a result of reduced deposit inflows.
Business loans in May increased at a 25 per cent annual rate.
For the first time in several months, the rapid expansion in business
borrowing at banks was not associated with a shift out of commercial
paper financing, as shown in the table, thus indicating continued strong
short-term credit demands by business.

Faced with heavy loan demands

and rapidly increasing costs of funds, banks in recent weeks have
begun to implement more stringent lending practices.

Under the new

CID guidelines, the prime loan rate charged large corporations was
adjusted upward three times in one-quarter point steps from 6-3/4 at
the end of April to 7-1/2 per cent in early June.

Furthermore, the

April 15th Quarterly Survey of Changes in Bank Lending Practices indicates a general across-the-board tightening of non-price lending
practices by banks, including more careful screening of applicants,
greater reluctance to make term loans, and stricter compensating
balance requirements.

In addition, a survey of loan commitments taken

at selected large U.S. banks revealed a greater reluctance by respondents
to extend new loan commitments; in the three month survey period ending
in mid-April, there was no increase in the volume of outstanding commitments at these banks.

A more detailed analysis of the results of

these surveys will be presented in the forthcoming Supplement.

II - 9

CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER 1 /
(Amounts in billions of dollars, seasonally adjusted monthly changes)
Business
loans
at all
commercial

banks 2/3/

Dealerplaced
commercial

paper

Annual percentage rate
of change

in total 2/

Total 3/

Average monthly changes
1972--Q%

1.0

9.9

QII

1.1

10 0

QIII
QIV

1.3
1.6

- .4
.2

.9
1.8

8.3
15.7

4.3

-1.3

3.0

24.6

1973--QI
January

3.9

- .2

3.7

31.0

February
March

5.3
3.6

-2.0
-,1 8

3.3
1.8

27.0
14.4

April
May

2.6
3.0

- .3
--

2.3
3.0 e/

18.2
23.3 t/

1/ Changes are based on last-Wednesday-of-month data.
2/ Adjusted for outstanding amounts of loans sold to affiliates.
3/
e/

Data revised on basis of December 31, 1972, Call Report.
Partially estimated.

Nonbank financial institutions.

Revised data indicate that deposit

growth in April at savings and loan associations was at an annual rate
of 7.2 per cent--somewhat higher than originally estimated.

Sample data

for May show a continuation of reduced deposit flows relative to the
first quarter, although deposit growth was slightly stronger than in
April.

The large volume of tax refunds disbursed in April and May--

more than double the amount refunded a year ago--may have bolstered
recent inflows to the savings and loans.
Analysis of S&L balance sheet data for April, the latest available, provides some insight into recent developments.

For the first

- 10

time in over a year, deposits held in passbook accounts decreased considerably, while certificate accounts continued to attract additional
funds.

Moreover, reflecting the slowdown in deposit growth together

with increased seasonal demand for takedowns of mortgage commitments,

S&Ls increased their borrowings substantially in April.

Net advances

from the FHLB Banks increased by $1 billion and borrowings from other
sources rose by $0.4 billion. However, there was little change in liquid
asset holdings during April, with the ratio of liquid assets to savings
and short-term borrowings at about 9.4 per cent for insured S&Ls-moderately above the 7 per cent legally required at that time.

early May, the FHLBB reduced this required ratio to 6.5 per cent, and
indications are that some associations drew down liquid assets during
the month.

In addition, borrowings from the Home Loan Banks rose by

about $700 million.

Since the beginning of 1973, these borrowings

have increased by over $2 billion, with the level of advances outstanding topping $10 billion at the end of May.
The 5 per cent annual growth rate previously estimated for mutual
savings banks in April appears to have been confirmed by more recent
reports.

Preliminary data for May indicate that deposit growth slowed

further.

Savings banks located in financial centers (particularly New

York City) fared less favorably than their suburban counterparts, but
over-all savings flows were down sharply from a year ago.

- 11

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

Mutual
savings banks
1972 - QI

QII
QIII
QIV
1973 - QI
1973 - March

April p/
May e/
p/
e/

Savings and loan
associations

Both

22.5
15.9
18.2
14.2

19.7
14.3

8.1

16.0

13.6

7.5

13.5
7.2
9.5

11.7
6.6
8.0

13.6

10.7
11.6
11.0

5.0
3.5

16.2

13.2

Preliminary.
Estimated on the basis of sample data.
Consumer credit.

The April increase in total consumer credit

outstanding amounted to $20.9 billion at a seasonally adjusted annual
rate, considerably less than the $25.7 billion average annual rate of
growth during the preceding six months but still high by historical
standards.
Slowing from March was most pronounced in instalment credit,
where extensions declined and repayments again rose.

Growth in auto-

mobile credit slowed along with auto sales, and large income tax refunds
apparently dampened the rise in personal instalment loans.

Other instal-

ment consumer goods credit and charge account balances showed larger
increases than in March.
Finance rates on consumer instalment loans have shown little
net change in recent months despite substantial increases in most other
market interest rates.

For example, rates on new car contracts pur-

chased by the major automobile finance companies, although up 3 basis

- 12

points in April to 11.88 per cent, were about unchanged from the yearearlier level.

At commercial banks, rates on direct loans for new car

purchases remained about unchanged in May at levels near those prevailing since last summer.
The gradual trend toward longer maturities on new car contracts
may have been accelerated by the dip in auto sales during April,

finance companies, 2.3 per cent of the new car contracts had maturities
over 36 months, up slightly from March and considerably above the 0.7
per cent in April 1972.

The weighted average maturity for all new car

contracts acquired by the major auto finance companies reached a new
high of 35.2 months in April.
Short-term markets.

The marked further tightening of money

market conditions since the May meeting has been reflected in steep
rate advances on short-term market securities.

The yield on 3-month

Treasury bills--which had been unusually depressed relative to the
rest of the short-term rate structure--has risen nearly a full percentage point to around 7-1/8 per cent, and rates on other short-term
instruments have advanced 50-70 basis points.

Most of the rate in-

creases occurred before the June 11 hike in the System's discount rate
to 6-1/2 per cent.

The relatively mild market response to the discount

rate change was attributable, in part, to widespread anticipation of

imminent Administration moves to strengthen wage-price controls.
The rise in bill rates relative to other short term rates
developed partly because earlier shortages in the market supply of
bills were alleviated.

The concentration of three Treasury bill auc-

tions in the last week of May (the regular weekly and monthly auctions,

II - 13

plus a pre-holiday weekly auction) added substantially to dealer positions, particularly because bidding by other investors was cautious in
the face of tightening money market conditions.

In addition, a sharp

decline in the Treasury's balance was in progress and this led to the
System supplying bills to absorb reserves.

In the last week of May

the Desk sold almost $200 million of bills into the market and ran-off
$600 million of bills in the auctions.

At the same time commercial

banks and foreign official accounts were adding to market bill supplies.
In general, when foreign official accounts were selling bills their orders
(amounting to some $680 million) were executed in the market, but when
these accounts were buying bills the Desk met such orders (totaling
$330 million) directly out of the System's Account.

Taken together,

this combination of influences swelled dealer inventories substantially
at a time when their financing costs were also rising, and this contributed importantly to the general rise in bill rates.

More recently,

market expectations of some strengthening of the wage-price control

program, the imminent redemption of June tax bills, and the projected
absence through July of Treasury financing have all contributed to a

stabilization of bill yields. Moreover, the current higher yields on
shorter than on longer maturity bills may indicate that the market is
expecting that short rates are near their peaks.
The general intensification of monetary pressure over the intrameeting period was also evident in the markets for negotiable bank CD's
and commercial paper.

Bank offering rates on CD's with 3-6 month

maturities moved up to about 8 per cent while the 90-119 day commercial paper rate rose to 7-7/8 per cent.

With corporate tax

- 14

liabilities large in June and the amount of maturing tax bills outstanding smaller than usual, it is possible that tax (and dividend)
payments out of maturing CD's and bank loans could be sizable.

Facing

such a prospect, many banks have raised CD offering rates in order to
minimize the impact of possible CD run-offs.

Reflecting the higher

cost of funds and continued strong demand for credit some banks have

also raised the prime rate on business loans to 7.50 per cent.
INTEREST RATES ON U.S. TREASURY SECURITIES
(Per cent)

May 15

Daily rates
May 22 May 29 June 5

Ch a

June 12

ng e
May 15-June 12

Treasury bills
3-month
6-month
1-year

6.17
6.40
6.42

6.60
6.84
6.80

6.84
6.95
6.91

7.13
7.13
6.98

7.14
7.13
6.93

+.97
+.73
+.51

Notes and Bonds
(Constant Maturity)
1-year
5-years
7-years
10-years

6.71
6.78
6.78
6.86

7.00
6.86
6.88
6.90

7.10
6.80
6.89
6.93

7.23
6.70
6.81
6.95

7,21
6.62
6.75
6.86

+.50
-. 16
-. 03
0

6.98

7.02

7.03

7.07

7.02

+.04

20-years

Change--week end-

May 16
Memorandum:
Federal funds
(daily average)
1/

Average for first

7.81

Statement week ended
May 23 May 30 June 6

8.06

7.95

6 days of the week.

8.43

June 12

8.32

ing May 15 to
week ending
June 12

+.51

- 15

SELECTED SHORT-TERM INTEREST RATES
(Per cent)

Daily rates

Change
May 15-June 12

May 15

May 22

May 29

June 5

June 12

7.25
7.25

7.38
7.38

7,50
7.50

7.75
7.75

7.88
7.88

+.63
+,63

7,50
7.00

7.63
7.70

7.70
7.75

8.00
8.00

8.10
8.00

+.60
+1.00

7.38
7.50

7.50
7,63

7,63
7.75

8 00
8,00

8,13
8.13

+.75
+.63

Federal agencies
1-year

7.08

7.29

7.39

7.53

7.51

+.43

Bank prime rate
(most prevalent)

7.00

7.25

7.50

+.50

Commercial paper
90-119 day
4-6 month
Large negot. CD's-l
Just under 3 mos,
6 mos.
Bankers accepts.
61-90 day
150-180 day

Highest quoted new issue.

II - 16
Long-term private securities markets.

Yields on long-term

corporate securities have begun to advance in recent weeks, in
response to sharp advances in short-term rates and the consequent
rising cost of financing dealer inventories,

the weakening of the

dollar, continued evidence of inflation, and a potential increase in
long-term borrowing by corporations.

The FRB index of yields on newly

issued Aaa utility bonds rose almost one-quarter of a percentage
point since the May Greenbook, while market yields on recently offered
bonds increased 14 basis points on balance over this period.

The

rise in the latter index would have been greater but for a brief and
vigorous rally in the middle of last week which was sparked by

expectations of action by the Administration on additional antiinflationary measures.

SELECTED LONG-TERM INTEREST RATES
(Per cent)
New
Aaa utility
bonds

1971
High

Recently offered
Aaa utility
1/
bonds

Long-term state
and local 2/
bonds

8.26 (7/30)

8.19 (1/2)

6.23 (6/24)

7.02 (2/5)

7.14 (12/31)

4.97 (10/21)

1972
High
Low

7,60 (4/21)
6.99 (11/24)

7.46 (4/21)
7.12 (12/1)

5,54 (4/13)
4.96 (12/7)

1973
High

7.64 (6/8)

7.60 (6/1)

5.35 (3/23)

Low

7.29 (1/12)

7/28 (1/5)

5,00 (1/19)

4
11
18

7.40
-- *
7.45

7.42
7.45
7.50

5.10
5.10
5.14

7.61

7.55

5.20

7.55
7.64p

7.60
7.59p

5.22
5.13

Low

1973
May

June 1
8
p/
*
1/
2/

Preliminary.
No observations available for new issues rated A or higher that
meet the criteria for inclusion in the series.
FRB series.
Bond Buyer.

II - 17
Public bond volume in June has picked up to an estimated $1.3
billion, primarily because of a build-up in the utility calendar,

but total public offerings for the second quarter as a whole have been
contraseasonally low.

On the basis of present scheduling, the staff

estimates that the July total will be less than $1 billion.
there is a potential for sudden growth in the calendar.

However,

Many invest-

ment bankers now expect long-term interest rates to rise over the
rest of the year and are encouraging borrowers with 1973 needs to
accelerate their issues.

Should prices and interest rates continue

to rise substantially, the build-up in the corporate calendar could
be large.
CORPORATE AND MUNICIPAL LONG-TERM SECURITIES OFFERINGS

Monthly or monthly averages, in millions of dollars

Corporate securities total
Public bonds

Privately placed bonds
Stock

State and local gov't. securities
e/

1972

1973
QI

3,398

2,741

2,525

3,000

1,528

981

1,000

1,300

900

780

469

650

800

500

1,087

1,324

875

900

650

1,970

1,937

1,750

1,900

1,600

July

May-' June-!

2,050

Estimate,

Forecast.
Life insurance company data on commitments and the proposed

pattern of takedowns over the first half of 1973 suggest a continued
high level of activity in the private placement market, although

II - 18

commitment policy might tighten later in the year should cash flows
come under pressure from rising policy loans, which recently showed an
upturn.

New equity issues appear to be tending down.

The staff

estimates that June volume will be about $900 million, and July
volume probably will be considerably lower.

In addition to the usual

summer slackening in new issues, scheduled issues by utilities for
that month are light.
The decline in corporate stock offerings appears to reflect
in part general deterioration in equity markets.

Offerings of shares

by bond funds have been smaller than in the first quarter, and a
number of smaller companies have postponed issues because of the
prolonged slump in stock market prices.

Stock prices fluctuated

widely during May and June but on balance declined.

Most recently,

however, prices have moved up, as in bond markets, reflecting
anticipations of strengthened price control measures.

Volume on the

major exchanges has been light.
Yields on long-term,tax-exempt bonds have edged up only 3
basis points on balance since the May Greenbook.

The total volume of

new issues has tapered somewhat in the second quarter, with the volume
of general obligation bonds declining more rapidly than the total.
Commercial banks, which are the principal purchasers of general
obligation bonds, have been able to absorb this reduced volume readily.

II -

While casualty companies are reported to be somewhat more selective in
their buying in recent weeks, they continue to make heavy purchases of

longer-term bonds and revenue offerings.
RECENT STOCK PRICE DEVELOPMENTS

Per cent change
Jan. 11 - May 25
May 25 - June 7
NYSE

-13.0

-1.5

D-J IND

-11.5

-1.7

AMEX

-15.0

- .8

NASDAQ

-23.1

-2.0

Mortgage market.

- 20

Lenders appear to have cut back new commit-

ments for home mortgages somewhat further during the past few weeks,
according to trade reports.

These sources suggest that S&L's in

particular have reduced their mortgage purchases in the secondary market
and have concentrated their lending on established customers, due to
uncertainties about future net savings inflows and to the exceptionally
large volume of mortgage commitments outstanding.

By the end of April

(latest available data), the backlog of mortgage commitments (including
loans in process) at insured S&L's totaled a near record $21 billion-equivalent to about 4 months of S&L lending, as measured by the volume
of loans either closed or purchased in April.
Interest rates on home mortgages in the primary market appear
to have been edging higher.

Effective yields on conventional first

mortgages closed during early May averaged 7.72 per cent for new-home
loans (up 1 basis point from early April) and 7.77 per cent for existinghome loans (up 7 basis points), according to the FHLBB series.

The

extent of the increase in average credit costs in this sector has been
restrained in part by expanded GNMA purchases of certain FHA/VA mortgages
at prices designed to limit the number of discount points paid by sellers,
and by usury ceilings that have begun to inhibit high loan-to-value ratio
lending on conventional mortgages.1/
1/

Fourteen States, mainly in the East and South, have 8 per cent usury
ceilings, and 4 others have 7-1/2 per cent ceilings. These usury
limits generally are applicable only to conventional home mortgages.

II - 21

In the secondary market, yields on home mortgages have continued
to increase, judging by FNMA's auction of its forward purchase commitments for Government underwritten loans that are too large in
qualify for GNMA discount subsidy.2/

size to

The average yield on these FHA/VA

loan commitments in the latest bi-weekly auction (June 11) was 8.04
per cent,

up 4 basis points from the preceding auction and the highest

level since July 1971.

The yield in FNMA's associated auction of high-

ratio, privately-insured conventional mortgage commitments has been
somewhat higher (8.44 per cent on June 11), although offerings have
remained relatively small.

Under its so-called Super Tandem Plan, GNMA stands ready to purchase
regular FHA and VA mortgages of $22,000 or less ($24,500 if 4 bedrooms or more) at 96 (new homes) or 95 (existing homes).

FNMA PURCHASE AUCTIONS

(FHA/VA HOME MORTGAGES)
Per cent
of offers
accepted

Accepted
Received
(millions of dollars)
1972 - High

365 (5/1)
61 (11/27)

Low

336 (5/1)

92 (5/1,

7/24)

Yield to
FNMA 1/
(per cent)
7.74 (10/30)

36 (11/27)

42 (3/20)

7.53 (3/20)

1973 - Feb.

5
20

129
110

65
72

51
65

7.71
7.73

Mar.

5
19

171
297

108
169

63
57

7.75
7.81

Apr.

2
16
30

235
217
261

146
191
186

62
88
71

7.86
7.89
7.92

May

14
29

258
212

188
140

73
66

7.96
8.00

June 11
185
142
77
1/ Data show gross yield to FNMA on 4-month commitments,

8.04
before deduction

of 38 basis point fee paid for mortgage servicing, assuming a prepayment period of 12 years for 30-year loans, without special adjustment
for FNMA charges for commitment fees and stock purchase and holding
requirements.

Federal finance.

- 22

In its mid-session review of the 1974

budget, released on June 1, the Administration projects unified budget
deficits of $17.8 billion for the current fiscal year and $2.7 billion
for fiscal year 1974.

These estimates are respectively $7 billion and

$10 billion smaller than those presented in the January budget.

The

revisions are due entirely to higher estimates for receipts, which are
now set at $232 billion for fiscal 1973 and $266 billion for fiscal 1974.
Most of the revenue increases are in personal and corporate
income taxes.

For 1974, estimates of revenues from each of these sources

have been raised by $4.5 billion, partly because of larger expected
growth in personal income and corporate profits, and partly because
experience with tax collections thus far this year suggests that receipts
at a given level of GNP are higher than previously estimated.

There

have been some minor changes in the projected composition of spending,
but no change has been made in total estimated outlays of $249.8 billion

for fiscal year 1973 and $268.7 billion for fiscal year 1974.
Current Board staff projections differ little from the midyear budget review.

For fiscal 1973 our receipts estimate is $500

million higher and our unified budget deficit consequently lower.

the expenditure side we have not changed our fiscal year 1973 forecast.
It should be noted, however, that in earlier years shifts in the timing
of expenditures between June and July have often produced unanticipated
changes in the fiscal year total amounting to as much as $2 billion.

- 23

For fiscal 1974, we are forecasting receipts $3.8 billion
larger than the Administration estimate, due mainly to higher corporate
income tax projections; but our expenditure forecast also exceeds that
of the Administration, by $1 billion, because we are assuming the
release of some impounded funds for grants to States and local governments.
The staff is

now projecting a high employment budget deficit

(NIA basis) of $4.5 billion for the current fiscal year and a surplus of
$1.1 billion for fiscal year 1974.

The extended outlook, as shown by

our half-year projections in the following table, indicates a steadily
increasing move toward restraint through calendar year 1974.

The

Administration's revised estimates--which are on a unified budget basis
and hence differ from the NIA approach in regard to timing and coverage-also indicate a shift toward surplus from this fiscal year to the next.

HIGH EMPLOYMENT BUDGET SURPLUS/DEFICIT
(Billions of dollars)
Fiscal year

Calendar half years

1972

1973

1974

estimate

-3.9

-2.3

June estimate

-3.9

-1.8

5.3

3.3

-4.5

1.1

1972
I
II

1973
II

1974
II

Administration 1/
Jan.

2/
Staff estimate2/
1/

1.8

-5.5

-3.5 - .6

2.7

These estimates are on a unified budget basis and are not available for
calendar half years. The shift in budget position resulting from overwithholding is not recorded in the Administration figures, but is
recorded in the staff figures.
These estimates are on a N.I.A.basis.

7.2

- 24

The end-of-May Treasury cash balance was $8.2 billion, $0.6
billion less than we had projected in the May Greenbook.

Refund checks

issued in May were about $2 billion higher than we had estimated,
raising total refunds for the month to about $6.6 billion.

However,

refunds in June are falling off more sharply than we had projected, and
it now looks as if total refunds for the year will be about $22 billion,
$1 billion more than estimated in the May Greenbook.

(Some of the

large May refunds, however, were being cashed early in June.)
Given our projected pattern of outlays and receipts, it now
appears likely that the Treasury will need $1 to $2 billion in additional
funds during August, either in the form of net cash borrowing or by
monetizing the capital gains obtained from the revaluation of gold.
A factor that might provide some pressure to hold down the size of
Treasury borrowing during the summer and fall is the adoption by the
Ways and Means Committee of a five-month extension of the $465 billion
debt limit ceiling.

This ceiling is $20 billion lower than that requested

by the Administration.

If enacted, it will encourage the Treasury to

aim for low levels in its cash balance and, perhaps, to defer some
outlays and schedule additional asset sales.

- 25

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

June

May
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues

As yet unspecified new
borrowing
Special foreign series

July

August
1.5

-1.8

-2.6

0.6

- .2
---

- .4
-2.5
-

.2
. 7

2.2

- .2--

Agency transactions, debt
repayment, etc.

-1.4

Plus:

Other net financial sources-

0.6

0.5

-1.3

Plus:

Budget surplus or deficit (-)

-4.8

5.9

-4.9

-0.1

-6.0- /

3.8

-5.6

12.0

6.4

6.5

Equals:

Change in cash balance

Memoranda:

Level of cash balance,
end-of period

b/
8.2-

0.1

Derivation of budget
surplus or deficit:
Budget receipts

16.5

28.9

17.8

21,7

Budget outlays

21.3

23.0

22.7

21,8

Maturing coupon issues

/
4.5

1.7-

Sales of financial assets

0.7

0.2

0.4

Budget agency borrowing

0.4

Net borrowing by government-sponsored agencies

1,6

1,1

2.0

held by public

0,1

0.9

a/ Checks issued less checks paid and other accrual items.
b/

Actual

In the May refunding, the Treasury sold $2.7 billion of notes and bonds to
the public, leaving a paydown of $1.7 billion.

n.e.--not estimated
* --

less than $50 million

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

I
Fiscal 1973 e/
Adm. Est.
F.R.
6-1-73
Board

Fiscal 1974 e/
Adm. Est.
F.R.
6-1-73
Board

Calendar Years
1972
1973
Actual FRBe/

F.R.B. Staff Estimates
Calendar Quarters Half-Yr.
1973
1974
I*
II
III
IV Jan-June

Federal Budget
Surplus/deficit

-17.8

-17.3

-2.7

0.1

-17.4

-10.8

-9.5

0.5

-6.5

6.0

Receipts

232.0

232.5

266.0

269.8

221.5

250.0

55.2

71.3 65.8

57.7

146.1

Outlays

249.8

268.7

269.7

239.0

260.8

64.7

66.6 65.3

64.2

140.1

19.2
n.a.
n.a.

19.2
-1.9
0.3

5.5
n.a.
n.a.

-0.1
1.0
-0.9

15.2
0.2
2.0

7.4
1.9
1.5

8.4
-1.8
2.9

-6.6 2.1
0.9 -0.6
1.0 -2.0

3.5
3.4
-. 4

-5.7
-1.8
1.5

Cash operating balance, end of period n.a.

12.0

n.a.

11.0

11.1

9.2

12.9

12.0 12.6

9.2

11.0

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

4.5
0.3
8.5

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

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

3.1
0.8
3.5

n.e.
0.2
12.7

1.2
0.1
2.0

1.2
-0.7
4.8

n.e.
0.4
2.4

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

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

-16.96/
240.4-'
257.3

n.a.
na.
n.a.

-0.9
275.7
276.6

-18.1
228.6
246.8

n.a.

1.1

-1.9

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

2/
Memo- :

3/
Sales of financial assetsBudget agency borrowing 4/
Sponsored agency borrowing 5/

4.7

1.0
0.4
3.5

National Income Sector
Surplus/deficit
Receipts
Expenditures
High Employment surplus/deficit
(NIA basis) 7/

*Actual
1/

e--projected

n.a.

-4.5

n.e.--not estimated

n.a.--not available

-3.1 -7.5P -7.0 0.1
2.0
-2.8
262.9 252.5 257.8 267.4 273.8 280.9
266.0 260.0 264.8 267.3 271.6 283.7

-2.0

-2.2

-4.7 -1.7

0.6

p.--preliminary

Includes such items as deposit fund accounts and clearing accounts.
The sum of sponsored and budget agency debt issues and financial asset sales does not necessarily reflect the
volume of debt absorbed by the public, since both the sponsored and budget agencies acquire a portion of
these issues.

2.7

footnotes continued
3/

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

Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee Valley
Authority, which is included in the Net Treasury Borrowing from the Public shown above.

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

Quarterly average exceeds fiscal year total by $4.2 billion due to spreading of wage base and refund
effect over calendar year.

Estimated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

6/13/73

STRICTLY CONFIDENTIAL (FR)
III -- T - 1

U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)
1972
Var

a"V

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

M,-

A...

175
5,435
-5,260

45
-1,198
-2,033
-422

48
-1,197
-1,664
-407

110
88
-557
7

-161
329
-523

453

347

140

-1,861

-1,887

170

236

-1,881
(-578)
14
6

-1,992
(-544)
77
28

160
(33)
-2
12

10,265

9,998

7,686

2,797

742

220

128

-5

2,597

-8,339

other

-3,339
-619
-733
-2,780
-406
-462

Foreign capital (excl. reserve trans.)
10,488
Direct investment in U.S.
322
U.S. corporate stocks
2,463
New U.S. direct investment issues
1,974
Other U.S. securities (excl. U.S. Treas.)
64
Liquid liabilities to:
4,816
Commercial banks abroad
3,905
Of which liab. to branches 3/
(178)
Other private foreign
809
Intl. & regional organizations
102
Other nonliquid liabilities
849
Liab. to foreign official reserve agencies
U.S. monetary reserves (increase. -)
Gold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies
Errors and omissions

1,265
457
69

547
7

153

-13

-4

-5

233

132

57
(-34)
182
-3
-727
27
9

-3,806

BALANCES (deficit -) 4/
Official settlements, S.A.

N.S.A.

r 1 1 007

-10,218
-9,980
-6,737

-7.814

-2,792

-14,684

-6.478

-4.323

-3,057

.15,823

-8,157

-5,927

-2,962

Net liquidity, S.A.

, N.S.A.

Liquidity, S.A. 5/
"
, N.S.A.
*
I/
2/
3/

-68
5,355
-5,423

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

-423
5,000
-5,423

-1,556'
-3,575

-918
15,343
-16,261

-6,816
48,840
-55,656

Remittances and pensions
Govt. grants & capital, net

-4,219

Imports 2/
Service balance

I . 10

Monthly, only exports and imports are seasonally adjusted.
Equals "net exports" in the GNP, except for latest revisions.
Balance of payments basis which differs a little from Census basis.
Not seasonally adjusted.

4/ Excludes allocation of $710 million of SDRs on 1/1/72.
5/ Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to

commercial banks and other foreigners.

700

III - 1

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

In the past month there have again been

flurries of speculation against the dollar.

The dollar has depreciated

against a weighted average of major currencies by almost 3-1/2 percent
since May 9. The market has responded nervously to news of political
difficulties and continuing rapid inflation in the United States, and
exchange rates fluctuated widely.

The German mark, in particular, has

been under upward pressure, strengthened by a severe tightening of
monetary and fiscal policy and a rising trade surplus.
Helping to support the dollar during May was the report of
a sharply better U.S. trade balance for April; together with the
generally better trade results for the first quarter, the improving
trend seemed to confirm the view that the devaluations would have a
substantial effect.

Contrary to earlier expectations, agricultural

exports seem likely to remain high for quite some time, though they may
slow between crop years.

Improvement in the U.S. trade balance is being

facilitated by an accelerated expansion of trade generally, as a broad
upswing in world demand generates gains in both volume and value terms.
The pattern of trade shifts that is emerging tends to support the
impression that the exchange rate changes are pushing trade balances
in an equilibrating direction.

The main exception seems to be the

growing German trade surplus.
For the month of April the official settlements balance
registered a surplus of about $700 million -- mainly reflecting

III - 2

market intervention and investment of reserves by Japan.

In May the

speculation that developed was reflected almost entirely in the
appreciation of other currencies against the dollar -- there was perhaps
a small deficit on the official settlements basis for the month.

Such

data as are available do not suggest major capital outflows from the
United States in April or May.

Foreign investors purchased, net, about

$140 million of U.S. corporate stocks in April, and reportedly were also
on the buying side in May.

Bank-reported claims on foreigners were up

moderately in April -- by about $200 million -- and weekly data do not
indicate a significant outflow in May.
Relatively complete data now being compiled for the firstquarter balance of payments show a surprisingly large jump in outflows
by U.S. direct investors at that time, probably involving flows of funds
to affiliates to enable them to hedge against exchange rate movements.
This was partly offset by a rise in income receipts and inflows of
foreign investment capital.

There apparently were large net unrecorded

outflows for the quarter.
Although the appreciation of some exchange rates against the
dollar since early May has been considerable, the movement of rates
tended to head off cumulative speculation, suggesting that the market
was not convinced that rates were greatly out of line.

It seems that

sentiment could readily shift in favor of the dollar if further strong
actions are taken against inflation in the United States and the trade

figures continue to indicate that the realignments are working as
expected,

III - 3

Foreign exchange markets.

The dollar came under strong selling

pressures in May, principally against the currencies of the European snake.
Nearly all of this pressure, at least against the currencies of the other
G-10 countries and Switzerland, was reflected in a decline in exchange rates
for the dollar, rather than central bank intervention.

The dollar depre-

ciated by some 3-1/2 per cent on a weighted average basis against those
currencies between early May and early June.

Against the snake currencies,

the depreciation averaged about 7 per cent.
Against the background of growing concern over the U.S. "energy
crisis" and the emergence of Watergate as a cause celebre, the dollar
weakened in early May when rumors circulated in the markets that a part
of the then forthcoming German anti-inflation package would be a revaluation of the mark.

Subsequently, the concern over the political and economic

outlook in the United States, fueled by continuing new revelations in the
Watergate investigations and accelerating U.S. inflation, came to the fore
as factors in the dollar's weakness.

The dollar was buoyed on May 24 and

25 by the release of favorable U.S. trade figures, but this rally was
short-lived.

A further tightening of monetary policy in Germany at the

end of May put additional pressure on the dollar.

In recent days the

dollar has held fairly steady pending the expected announcement of new
anti-inflation measures in the United States.
During much of the latter part of May and early June, market
conditions were quite hectic, some would say "disorderly."

Rates moved

over a range of as much as two per cent on several days, apparently on

III - 4

little volume.

In recent days, however, rate movements have been fairly

small, with the dollar moderately above its lows of early June.

SPOT RATES AS A PER CENT OVER MAY, 1970 PARITIES
(Average for week)
Period

Lira

Yen

May

2
9
16
23
30

3.7
4.0
5.6
6.6
6.4

7.7
7.9
8.0
8.1
8.3

29.0
28.8
30.5
32.9
33.7

34.9
34.8
37.2
40.9
40.8

22.3
22.6
24.8
26.9
27.4

5.9
5.8
6.2
6.2
6.3

21.6
22.0
23.7
25.7
26.2

24.1
24.3
26.7
28.9
29.4

35.7
35.7
36.5
36.6
36.1

June

6
13

7.2
7.3

8.5
8.3

38.4
39.5

42.7
42.3

30.5
30.2

7.3
4.6

29.4
28.8

32.1
31.8

36.8
36.3

The European band did not experience any severe strains in May
as the snake currencies moved up and down in general uniformity.

The

Netherlands Bank did have to sell moderate amounts of European currencies
to support the guilder.

After the German discount rate increase on May 30,

the German mark began firming relative to its European partner currencies,
and currently is at the top of the band.

On June 12, the guilder required

a substantial amount of central bank support against the mark, perhaps
as much as $50 million equivalent.
While the dollar showed its largest declines against the European
band currencies, it showed relatively small changes vis-a-vis sterling
and the yen, in part because of central bank intervention.

The pressure

on the dollar in Japan was reflected in a cessation of Bank of Japan
sales of dollars, which had been very heavy from mid-March through early
May and had kept the yen appreciated above levels it would otherwise

III - 5

have reached.

In the case of sterling, the Bank of England purchased

some $300 million during May in market intervention and added another
$300 million to its reserves from direct conversions of Euro-dollar
borrowings by local authorities in the United Kingdom.
The gold market experienced an orgy of speculative fervor in May
and early June, reflecting the worldwide concern over the U.S. political
and economic situation and, indeed, rampant world inflation.

The price

in London rose from $90.70 on May 1 to a peak of $127.00 on June 5 before
falling back to around $117.00 on June 13.
Euro-dollar market.

Euro-dollar interest rates have firmed over

the past four weeks under the influence of a general increase in interest
rates both in the United States and abroad.

The widespread nature of this

increase in rates is indicated by the number of countries whose central
banks announced discount rate increases during this period.

These

included Germany, the Netherlands, Japan, Canada and the United States.
The increases in Euro-dollar rates during the past month have not been
as large as the increases in U.S. market rates of comparable maturity.
The excess of rates on one- and three-month Euro-dollar deposits over
comparable U.S. CD rates

averaged less than 1/2 percentage point in the

week ended June 13 compared to nearly 1 percentage point in the week ended
May 16.

The overnight Euro-dollar rate has been below the Federal funds

rate almost continuously over the past four weeks, by an average of nearly
1/2 percentage point in the period June 1-12,

U.S. banks' borrowing from

their foreign branches continued to show substantial day-to-day fluctuation but little trend on average over the period.

III - 6

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
(3)
(2)
(1)
Average for
DifferOvermonth or
week ending night Federal ential
Wednesday Euro-$' / Funds-~(1)-(2)(*)

(4)
1-month
Euro-$ 1 ,
Deposit-

(5)
30-59 day
CD rate,
(Adj.)='

(6)
Differential
(4)-(5)(*)

1972-Oct.
Nov.
Dec.

4.77
4.74
4.75

5.05
5.05
5.33

-0.28 (0.91)
-0.31 (0.88)
-0.58 (0.61)

5.10
5.08
6.05

5.10
5.01
5.25

0.00
0.07
0.80

(1.28)
(1.34)
(2.31)

1973-Jan.

5.72

5.94

-0.22 (1.21)

5.97

5.79

0.18

(1.67)

Feb.

9.034/

6.58

2.45 (4.71)

7.70

6.35

1.35

(3.28)

Mar.
Apr.

9.197.43

7.90
7.12

2.10 (4.40)
0.31 (2.17)

8.79
8.00

7.20
7.27

1.59
0.73

(3,79)
(2.73)

2
9

8.32
7.03

7.43
7.60

0.89 (2.97)
-0.57 (1,19)

7.85
7.92

7.37
7.37

0.48
0.55

(2.44)
(2.53)

16
23

7.22
7.25

7.81
8.06

-0.59(-0.04)
-0.81(-0.18)

8.34
8.21

7.37
7.63

0.97
0.58

(1.70)
(1.29)

7.84
30
6p/ 7.45

7.95
8.43

-0.11 (0.57)
-0.98(-0.33)

8.49
3.59

7.63
8.26

0.86
0.33

(1.60)
(1.08)

8.29

8.32

-0.03 (0.69)

3.65

8.53

0.12

(0.87)

1973-May

June

1/ All Euro-dollar rates are noon bid rates in the London market; overnight
rate adjusted for technical factors to reflect the effective cost of
funds to U.S. banks.
2/ Effective rates.
3/ Offer rates (mdeian, as of Wednesday) on large denomination CD's by
prime banks in New York City. CD rates are adjusted for the cost of
required reserves, using a marginal reserve requirement rate of 5 per
cent through June 6 and 8 per cent thereafter.
4/ 8.07 excluding March 29. A technical anomaly involving a quarter-end
squeeze on dollar balances raised overnight Euro-dollar borrowing to
60 per cent on that date.
*/ Differentials in parentheses are after adjustment of Euro-dollar rates
for the marginal reserve requirement relevant to banks with borrowings
in excess of their reserve-free bases. This reserve requirement was at
a marginal rate of 20 per cent through May 9, after which it dropped
to 8 per cent.
p/ Preliminary

III - 7

U.S. balance of payments.

The overall balance on the official

settlement basis in May is estimated to have been slightly in deficit;
in April there was a surplus of $700 million.

While there was renewed

pressure on the dollar during May, there was only limited market
intervention by foreign central banks.

The pressure on the dollar was

therefore largely reflected in exchange rate changes, with the dollar
depreciating by about 3-1/2 percent against major currencies on the
average.
The liabilities of U.S. agencies and branches of foreign
banks increased substantially (by about $700 million) in May as

overnight interest rates abroad were below the Federal funds rate.
Liabilities of U.S. banks to their foreign branches also increased
in May --

by about $300 million.
Foreign purchases of U.S. stocks dipped in April to a net

of $140 million, compared with a monthly average of over $400 million

in the first quarter.

In view of the weakness in the U.S. stock

market and concern about the dollar, these purchases still appear
quite strong.

Net purchases in May are expected to be close to the

April level and brokers report a pickup in purchases in the early part
of June.

However sales of U.S. bonds (mainly Eurobond issues) to

private foreigners dropped off sharply in May, following a strong
showing in the first four months of the year.

III - 8
U.S. bank-reported claims on foreigners increased about

$200 million in April, mainly in export credits which are exempt
from the VFCR program.

Claims subject to the program declined.

Weekly data for May indicate only a small increase in bank claims
on foreigners in that month.
A full set of accounts for the first quarter balance of
payments is still not available but early estimates have been made
for some major items.

Receipts of income and fees from direct

investments abroad appear to have been particularly strong, generating
a surplus in the service component about large enough to offset the
trade deficit for the quarter.

(Figures shown in the standard tables

in this Greenbook do not yet reflect this information.)

In the

capital accounts, the outstanding feature seems to have been a sharp
rise in outflows of direct investment capital to well over $2 billion,
compared with a quarterly average of about $800 million last year.
On the other hand, there was a moderate inflow of foreign capital
for direct investment in the United States, in addition to the
sizable inflows to purchase American securities which had already
been apparent in the monthly data.

It still appears that there were

substantial net outflows from the United States that were unrecorded
and that the negative errors and omissions for the first quarter
was roughly $4 billion.

III - 9

U.S. foreign trade.

In April the United States had a trade

surplus of $2 billion at an annual rate (balance of payments basis)
the first monthly surplus in about a year and a half.

This followed

a large improvement in March, when the trade deficit dropped to a

deficit rate of less than $1 billion. For the first four months of
1973 the trade balance was a deficit of $2-1/4 billion at an annual
rate, compared with deficits of $6-3/4 billion in the fourth quarter
of 1972 and in calendar 1972.
The improved U.S. trade position this year -- particularly
in March and April -- stemmed from a combination of continuing large
advances in exports while imports, which had also increased very
sharply in January, leveled off in February-March and then declined
in April.

Exports in January-April were at an annual rate of

$62-1/4 billion, 18 percent higher than in the fourth quarter of 1972;

imports were at a rate of $64-1/2 billion, 8 percent over the fourth
quarter rate.

The values of both exports and imports have been buoyed

by rising prices.

Import prices accelerated very sharply in April,

rising by over 5 percent from March, largely a reflection of the
February devaluation.

The volume of exports has expanded, particularly

in March and April, while the volume of imports has trended downward
since January.
Shipments of agricultural products accounted for about one-

half of the increase in the total value of exports from the fourth

III - 10

quarter of 1972 to the first four months of this year.

In April,

however, although the value of agricultural exports held at a $16 billion
annual rate (compared with less than $11 billion in the fourth quarter),
the volume of such exports fell for the first time since last
September because of supply limitations, mainly of soybeans.

Further

rises in prices of agricultural exports are expected to offset to a
considerable degree any temporary decline in the volume of exports of
agricultural commodities until new crops become available.
Although overshadowed by the spectacular rise in agricultural
exports, nonagricultural exports have also increased sharply this
year.

With foreign economic activity on the rise, particularly in

Japan and Europe, exports of machinery and nonagricultural industrial
materials have been exceptionally strong. While foreign orders for
U.S. machinery fell quite sharply in April, the level of such orders

remains high and the backlog continues to grow.

Exports of nonfood

consumer goods (other than automobiles), small and relatively stable
in the past, have also been strong in January-April, rising by
15 percent over the value of exports in the fourth quarter to a level
nearly $1 billion greater (at an annual rate) than in calendar 1972.
The increase in these exports was widespread by commodities, including
both durable and nondurable types, and to all major areas.
The flattening in the value of imports since January is
particularly pronounced in industrial materials (other than fuels)

III - 11

and consumer goods (other than automobiles).

The slowdown in imports

of industrial materials -- paper, lumber, steel and nonferrous metals -is puzzling in view of the upsurge in domestic economic activity in
the first quarter.

One possible explanation is that the world-wide

economic boom has resulted in some supply shortages abroad.

It is

also possible, of course, that inventories of these imported goods
had been built up in January and earlier months with a subsequent
slowdown in imports while inventory holdings were being reduced.
The downturn in imports of consumer goods (other than autos) may be
related to the increasing effectiveness of the Smithsonian realignment.
Imports of foreign cars (in numbers) have been generally
flat, and have been below the level of U.S. sales of these cars
since December 1972.
inventories.

This has resulted in a sizable reduction in

To the extent that there is need to replenish inventories

of imported materials, cars and other imported products, particularly
in view of the projected continued strength in domestic economic

activity through the third quarter, imports can be expected to rise
somewhat in the coming months.
The improved over-all trade balance so far this year has
resulted from a more favorable trade balance with the developed
countries, particularly Japan.

The trade deficit with Japan in

January-April was down to an annual rate of a little over $2 billion,
compared with rates of over $4 billion in each quarter of 1972.

III

- 12

In March-April the deficit shrank further to a $1 billion rate. Exports
to Japan have risen steeply -- particularly agricultural products and
industrial materials -- while imports from Japan have leveled off,

with significant slowdowns in autos, steel and motorcycles.

The

share of Japan in U.S. imports, which had risen steeply since the
early 1960's, declined in the first four months of the year.
Our trade balance with Western Europe in January-April was
a substantial surplus of about $1-1/2 billion at an annual rate,
compared with deficits throughout most of last year, as exports (mainly
agricultural commodities but also aircraft and machinery) rose more
sharply than imports.

However, the U.S. trade deficit with Germany

remains about as large as it was last year.

The entire improvement

has been with other EC countries, mainly the Netherlands but also
France and Italy. Our trade surplus with Eastern Europe increased,
largely reflecting heavy grain deliveries to the Soviet Union.
Our trade deficit with Canada increased moderately in JanuaryApril; imports (largely automobiles and industrial materials) increased
at a faster pace than exports (largely automobile components and
machinery).
The U.S. trade balance with the developing countries, in
total, changed very little in January-April compared with the
corresponding period of a year earlier.

There was an improvement in

our balances with the developing Asian countries but this was just about
offset by a worsening in our trade position with the African countries.

III - 13

Trade Developments in Other Industrialized Countries.

Inter-

national trade has expanded at an accelerating pace since the low point
around the end of 1971.

The average export growth of industrial countries,

which had slowed to an annual rate of only 5-1/2 per cent (measured in
local currencies) in the second half of 1971, was at a 16 per cent rate in
the second half of 1972 and is projected to accelerate to a rate of over
18 per cent in the first half of this year.
This acceleration results in part from the general upswing in
economic activity in the industrial countries, the resumption of more
rapid growth in import demand on the part of the less-industralized
countries, and recently, to a significant extent, from price increases.
But volume growth also shows a considerable acceleration -- almost
tripling from a 4-1/4 per cent annual rate in the second half of 1971
to an estimated 12-1/2 per cent in the first half of this year.
This near-record growth of trade in recent quarters should
help to accommodate the expected adjustment of trade flows in response
to the changes in relative price and cost positions resulting from
the exchange rate changes which have occurred during the past two years.
The difficulties of disentangling the various factors explaining shifts
in trade flows are well-known.

At this point, cyclical developments

and above-average price changes appear to predominate, but some shifts
in longer-run trends are becoming discernible.
In terms of volume, U.S. exports in recent months appear to
have grown somewhat faster than those of most other major industrial

III -

countries.

And the growth of U.S. import volume has moderated considerably,

despite the very fast expansion of economic activity.

In contrast, the

volume of imports in other industrial countries in the first quarter of
this year rose at an accelerating rate -- to a level more than 20 per cent
higher than a year earlier.

A notable exception may be Germany, where

March-April data show only a small increase in import volume despite increasingly high levels of economic activity.
These recent changes in the volume of trade appear to foreshadow
some shift in the longer-term trends which are not as yet clearly apparent
in the value data because of the distorting effects of price changes resulting from exchange rate changes.

Still, the geographical composition of

the value changes (no volume data by region are available) lends support to
the hypothesis that shifts in underlying trends may have contributed
materially to the recent changes in trade flows.

In trade with the non-

OECD area in recent months, the United States has maintained its market
share and even increased it marginally -- a basic shift from the trend
towards declining U.S. shares in the markets of these countries.

And in

European markets the U.S. share has stabilized, and may now be rising
slightly.

However, the shares of Japan and Australia in European imports

have increased considerably more, albeit from a much smaller base.

The

increasing Japanese market share reflects a shift of Japanese exports
away from the U.S. market to those of other industralized countries.

Such

a shift clearly is associated with the fact that the revaluation of the

III -

yen was considerably larger vis-à-vis the U.S. dollar than vis-à-vis the
European currencies.

But the Japanese voluntary export restraint programs

also would tend to work in that direction.
Trade trends in Japan, in addition to the factors mentioned above,
have reflected the strong upsurge in domestic activity which has stimulated
imports and created restraints for exports.

The rise in industrial pro-

duction and the associated upward swing in the inventory cycle have greatly
increased demand for imports of various commodities, in particular of
lumber, wool, steel scrap and soybeans, all which have sharply increased in
price as well.

Other factors contributing to the import expansion include

past actions to lower tariffs and reduce nontariff barriers.

The decontrol

of gold imports for private use in April has added further impetus to the
growth of imports --

for the year ending next March, this action may

increase Japan's import bill by almost $0.5 billion.
Import volumes, thus, have grown sharply during the past nine
months, rising from a year-to-year rate of increase of 18 per cent in the
second half of 1972 to a 21 per cent rate in the early months of this
year.
May.

Preliminary data indicate that this acceleration continued through
Export volumes, though rising, have grown much less than imports:

by 9 per cent, year-over-year, in the second half of 1972 and by 14 per
cent early this year.
With export unit values only rising marginally and average import
values accelerating considerably after an initial fall associated with the
revaluation of the yen, the trade surplus, in yen terms, began to decrease

III -16
in the third quarter of 1972.

In U.S. dollar terms, it was down from a

seasonally adjusted annual rate of $5-1/4 billion in the third quarter
of 1972 to about $2-1/2 billion in April, 1973.

In May, according to

preliminary reports, the surplus was further reduced.

Although some

part of this reduction results from temporary factors, such as supply
shortages of various commodities, some part reflects the beginning
adjustment to the changed cost and price relationships vis-à-vis the
United States following the revaluations of the yen.
In the United Kingdom, the volume of exports remained relatively
unchanged, when measured in terms of half-yearly averages, from mid-1971
through the end of 1972.

In the first quarter of this year, however,

export volumes (seasonally adjusted) averaged 12 per cent higher than in
the last half of 1972.

The growth in exports this year has been widely

distributed among the various commodity groups, with major gains in food,
textiles, chemicals and metals.

The most recent acceleration in export

growth seems to reflect mainly increased sales to North America and to
the EC.

This is due in part to the effective devaluation of the pound

vis-à-vis the EC currencies from mid-1972, as well as to the entry of the
U.K. into the EC.
The volume of imports has been increasing at an accelerating
rate since early 1972.

In the first quarter of this year it was 8 per

cent above the average volume during the second half of last year.

contrast to last year when imports of finished manufactured goods rose

III - 17

most rapidly, the fastest rate of growth this year has been in imports of
basic materials.
Changes in the value of trade have been affected significantly
by price developments with export unit values rising much less than import
unit values.

During the first quarter of this year, exoort and import

unit values were 3 and 11 per cent higher, respectively, than in the second
half of 1972.

The increase in import unit values reflected both higher

world prices for many commodities and the downward float of the sterling
exchange rate.
As a result of these developments, the trade deficit has tended
to increase since early in 1972.

In terms of U.S. dollars, it rose from

an annual rate of $2-1/2 billion in the second half of 1972 to almost $3
billion in the first four months of this year.
In Germany, the volume of both exports and imports has risen
more or less in line with total OECD trade, but in recent months export
growth has accelerated substantially, while imports seem to have flattened
out.

Prices of exports and imports (in DM) changed only slightly
between 1971 and 1972.

In recent months, however, import prices have

risen sharply -- by 6.4 per cent between the end of 1972 and April 1973 -and export prices by a larger, but more moderate, 4.8 per cent.
Reflecting these price developments, the German trade surplus,
measured in DM, has risen somewhat less than volume change would indicate.

III - 18

In U.S. dollar terms, the trade surplus has risen from an annual rate of
about $6-1/2 billion in 1972 to around $8 billion in February-March of

this year.

Large increases in export orders indicate that exports are

likely to continue to expand at a rapid rate.

But given the high rate

of economic activity, it also would seem likely that import growth will
accelerate in coming months.
In France, the volume of trade rose sharply in the first half
of 1972 and began to rise further towards the end of the year.

Buoyed

by rising exports of agricultural products and automobiles, export
volume in the last half of 1972 was 13.3 per cent higher than in the same
period a year earlier.

The volume of imports also rose substantially,

particularly those of consumer goods and agricultural products from outside
the EC.

Import volume in the second half of 1972 was 14.6 per cent

higher than in the same period a year earlier.

In contrast with develop-

ments elsewhere, export and import unit values were virtually unchanged
at the end of 1972 from year-earlier levels.
In U.S. dollar terms, the trade deficit has grown from an
annual rate of less than $50 million in the second quarter of 1972 to a
$1.7 billion rate in the first quarter of 1973.

Most of this deteriora-

tion was in trade with the United States, but some part also reflected
a relatively faster growth of imports from other European countries as
compared with the expansion of exports to that area.

The latter develop-

ment, in particular, reflects rising internal demand which tends to pull
in imports and to put some constraint on export supplies.

III - 19
In Italy, the volume of exports and imports accelerated last
autumn, with imports rising moderately faster than exports.

After re-

maining relatively stable during 1971 and the first nine months of 1972,
imports rose sharply in the fourth quarter to a level 19 per cent higher
than in the same period a year earlier.

The surge in imports resulted

from a rebuilding of inventories, a new upturn in fixed investment spending, and a sharp climb in food imports because of a fall in agricultural
output last year.
Exports rose moderately during 1971 and the first nine months
of 1972, but in the fourth quarter increased to a level 16 per cent
higher than in the same period a year earlier.

All of the increase in

exports last year was due to non-food items, with foodstuff exports remaining relatively stable due to supply problems.
Export unit values (measured in local currency) remained virtually
stable during 1971-72, and import unit values increased only slightly.
In contrast with the experience of most other countries, the stability
in average trade values was maintained through the second half of 1972.
As a result of these developments, the trade deficit (in terms
of lire with imports c.i.f.) has been increasing since the second quarter
of 1972.

In terms of dollars, it increased from a seasonally adjusted

annual rate of $0.2 billion in the first quarter of 1972 to $1.9 billion
in the December 1972-January 1973 period.

In the coming months, rising

economic activity should result in continuing increases in imports.

But

III - 20
the large effective devaluation of the lira since the beginning of this
year should be reflected both in an upward movement of exports and a
damping down of imports some time hence.
In Canada, the volume of imports during most of 1972 and into
early 1973 has been rising faster than that of exports.

This reflects

largely the fast expansion of domestic activity in Canada.

Because export

and import unit values rose only moderately, and more or less at the same
rate, during 1972, the Canadian trade surplus was reduced during the year.
The strength in the value of merchandise imports in 1972 was
widespread, with the largest increases being recorded in purchases of
consumer goods and machinery and equipment, including agricultural equipment.

Purchases from the United States rose by about 17 per cent, but

those from Japan and Europe rose even faster.
The growth of Canadian exports, other than that of agricultural
products, was largely concentrated in sales to the United States, being
partly a reflection of the virtually unchanged exchange relationship
between the Canadian and the U.S. currencies, and partly a reflection of
increasing demand for industrial materials in the United States.

During the first three months of 1973, both export and import
unit values rose sharply, with export average values rising 4-3/4 per
cent between December 1972 and March 1973 and those for imports 4-1/4 per
cent.

Exports in January-April 1973 began to outstrip imports, partly

III - 21

because of rising prices for wheat and other commodities, but partly
also because of rising volumes.

As a result, the trade surplus for these

four months rose to an annual rate of $1-3/4 billion (seasonally adjusted)
as compared with a surplus of $1-1/4 billion in 1972.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, June 18-19, 1973 : Greenbook

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