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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System June 16, 1967 SUPPLEMENTAL NOTES The Domestic Economy Industrial production in May was 155.5 per cent as compared with 156.0 in April and 155.3 a year earlier. Output of final products and industrial materials declined, Auto assemblies were unchanged from the April level and production of television sets and appliances increased. other consumer durable and nondurable goods declined. Output of some Production of industrial equipment declined further and output of commercial equipment leveled off at the record April rate. Production of iron and steel was about unchanged, while output of construction materials and some nondurable materials declined. Revised data on unit labor costs in manufacturing (confidential until released) indicate that instead of rising, these costs edged off one-tenth in April to 104.8 from their March peak, and remained unchanged in May. Unit labor costs in both April and May were 4.5 per cent above a year earlier, as compared with an over-the-year increase of 5.1 per cent in March. Personal income advanced $2.8 billion in May to a record $616.9 billion annual rate, compared with the exceptionally small $1.4 billion rise in April. The larger rise in May mainly reflected an $800 million increase in total transfer payments to an annual rate of $52.4 billion, following a $400 million decline in April. Medical care payments under the Social Security program were an important factor in the rise. Wages and salaries rose by $700 million, the same amount as in April, to a $414.9 billion annual rate. Both construction and manufacturing payrolls declined again in May. Wages and salaries in manufacturing were at an annual rate of $130.8 billion, a decline of $400 million compared with $300 million in April. The strike in the rubber industry accounted for about half the May drop. Payrolls in service and at all levels of government grew steadily and rose again in distribution as the strike ended in the trucking industries. income rose $300 million to a $19.9 billion annual rate. Farm Income from business and professional proprietorships, rents, dividends and interest advanced moderately. The Domestic Financial Situation Yields on new corporate and municipal bonds edged higher this week, breaking the relative yield stability that prevailed over the preceding two weeks. In the corporate market, a sizable overhang of unsold issues in syndicate is indicative of the less than enthusiastic reception accorded many of the new issues even at slighter higher yields, although several large industrial offerings were well received as expected. Similarly, the small volume of new municipal offerings this week has not been well received at current yield levels. Official data from FHA have confirmed the turnaround during May in yields on home mortgages. Fairly widespread though minor increases in contract interest rates on conventional new-home mortgages brought the national average up slightly, to a level that was 65 basis points above the plateau that prevailed from the spring of 1963 through Secondary-market yields on FHA home mortgages the summer of 1965. rose fairly sharply in all regions, as average discounts returned close to 4 per cent. The level in May for this secondary market series was 99 basis points above the 1963-65 plateau. During May, returns on new issues of high-grade corporate bonds increased even more sharply than yields on home mortgages. As a result, yield spreads in favor of mortgages declined for the third consecutive month to reach an unusually narrow margin. AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES SECONDARY MARKET: PRIMARY MARKET: FHA-insured loans Conventional loans Change (Basis points) Leyel (Per cent) Change (Basis points) 6.70 6.65 0 - 5 6.81 6.77 n.a. - 4 6.60 6.50 6.45 6.40 6.45 - 5 -10 - 5 - 5 5 6.62 6.46 6.35 6.29 6.44 -15 -16 -11 - 6 15 Level (Per cent) 1966 November December 1967 January February March April May NOTE: FHA series; interest rates on conventional first mortgages (excluding additional fees and charges) are rounded to the nearest 5 basis points; secondary market yields are for certain 6 per cent FHA-insured Sec. 203 loans. Corrections: To Greenbook of June 14, 1967. Page 111-5, second line of the table heading should read "Late April to Late May." SA - 1 SUPPLEMENTAL APPENDIX A: SURVEY OF BANK LENDING PRACTICES, MAY 1967* The May 15 survey of bank lending practices was the second conducted on the new reporting schedule. The panel of respondents which had been increased in February from 77 to about 133 banks was changed slightly in May due to dropouts, exclusion of branches and mergers. A summary of the most recent changes in bank lending practices follows. Strength of Loan Demand The proportion of respondent banks reporting that loan demands had increased in the previous three months rose to 30 per cent in the May Survey, up from about 6 per cent in February (see Table 1). Moreover, nearly half of all respondents anticipated that demands would strengthen in the ensuing 3 months. Strengthening was particularly evident at banks with total deposits under $1 billion. Comparison of the reported data for the February and May Surveys suggests, however, that bank forecasts of their loan demand in the recent period were quite unreliable. While the number of banks in the previous Survey predicting increased demand over the February-May period was about equal to the number reporting in May that demands had strengthened in this period, the composition of these two groups of banks differed considerably. As is shown in Table 3, of the 39 banks in the February Survey that predicted stronger demands ahead, only 13 reported in May that demands actually had strengthened. On the other hand, of the 92 banks that predicted unchanged to weaker demand in February, 28 reported stronger demands in May. Lending Terms and Conditions Despite the realized and anticipated increase in loan demand, some further easing in lending policies was reported. Relaxation of lending terms was widespread in the case of interest rates, with over 70 per cent of the respondents reporting that their policies were moderately easier. These presumably reflected adjustments to the second reduction in the prime rate on March 27. But, on the other hand, few respondents indicated that they had eased on their non-price loan terms and conditions, such as on compensating balances or standards of credit worthiness. Availability of Loans Despite little change in non-price lending terms and conditions, there were clear indications in the reported practices with respect to reviewing credit lines and loan applications that credit availability at * - Prepared by Rosalie Ruegg, Economist, Banking Section, Division of Research and Statistics. SA - 2 banks had increased. Nearly one-third of all respondents, for example, reported that their policies with respect to lending to new customers had been eased. While easing of policies in this area was not as widespread as in February, the cumulative effect probably has been considerable, since some respondents reported easing in both the February and May Surveys. As might be expected, most of the relaxation has occurred at banks with unchanged or weaker loan demand, although nearly a third of the banks easing policy reported stronger loan demand. While there has been little change from the firm position of last September in bank consideration of the loan applicant's value as a depositor, a number of banks have tended to place less emphasis on the intended use of loan proceeds. The most definite indication of a more favorable loan climate was the increased willingness of banks to make the particular types of loans covered by the survey, Particularly noteworthy was the increased willingness by more than half the respondents to make single family mortgage loans, while the least change related to multi-family mortgages. Other than weaker price terms, the only indication of ease in terms and conditions of lending to "noncaptive" finance companies pertains to the establishment of new or larger credit lines. Approximately a quarter of all respondents reported an easier policy, but nearly onefifth noted some firming. Bankers' Comments A number of banks attributed their more relaxed loan policies to recent large deposit inflows and increases in bank capital. In addition, some banks listed stationary or reduced loan demand, the desire to attract new business, and more aggressive lending by their competitors. Loans to new customers and family-type loans were specified a number of times as areas of particular ease. In the case where banks gave increased loan demand, actual or anticipated, as the reason for their failure to relax lending practices or for their further tightening, many indicated that they had made exceptions in the case of single-family mortgage loans, consumer loans, and interest rates. June 16, 1967. Not for quotation or publication TABLE 1 QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE U.S. 1/ (STATUS OF POLICY ON MAY 15, 1967, COMPARED TO THREE MONTHS EARLIER) (Number of banks in each column as per cent of total banks reporting) Total Much Stronger Moderately Stronger Essentially Unchanged Moderately Weaker Much Weaker STRENGTH OF DEMAND FOR COMMERCIAL AND INDUSTRIAL LOANS (after allowance for banks's usual seasonal variation) COMPARED TO THREE MONTHS AGO 100.0 4.0 29.4 45.2 100.0 0.8 49.2 44.4 0.0 ANTICIPATED DEMAND IN THE NEXT 3 MONTHS Number Answering Question Much Firmer Policy Moderately Firmer Policy Essentially Unchanged Policy 5.6 Moderately Easier Policy 0.0 Much Easier Policy LENDING TO NONFINANCIAL BUSINESSES Terms and Conditions Interest rates charged Compensating or supporting balances Standards of credit worthiness Maturity of term loans Reviewing Credit Lines or Loan Applications Established customers New customers Local service area customers Nonlocal service area customers 100.0 100.0 100.0 100.0 0.0 0.8 0.0 0.0 1.6 7.1 10.3 4.8 27.0 86.5 88.9 87.3 71.4 4.8 0.8 7.9 0.0 0.8 0.0 0.0 100.0 100.0 100.0 100.0 0.0 2.4 0.0 2.4 6.3 4.0 8.1 81.0 59.5 79.9 73.4 15.8 31.0 14.5 15.3 0.8 0.8 3.2 1.6 0.0 (continued) 1/ Survey of Lending Practices at 126 large banks reporting in the Federal Reserve Quarterly Interest Rate Survey as of May 15, 1967. Number. Answering Question Factors Relating to Applicant 2/ Value as depositor or source of collateral business Intended use of the loan Much Firmer Policy Moderately Firmer Policy Essentially Moderately Easier Unchanged Policy Policy Much Easier Policy 100.0 100.0 1.6 1.6 10.3 4.0 82.5 75.4 5.6 19.0 0.0 0.0 100.0 100.0 100.0 100.0 0.0 0.0 0.0 5.6 2.4 4.8 5.6 12.0 52.8 92.8 93.6 59.2 44.8 2.4 0.0 0.0 0.8 0.0 LENDING TO "NONCAPTIVE" FINANCE COMPANIES Terms and Conditions Interest rate charged Compensating or supporting balances Enforcement of balance requirements Establishing new or larger credit lines Number Answering Question Considerably less willing Moderately less willing 0.0 23.2 Essentially Unchanged Moderately more willing Considerably more willing WILLINGNESS TO MAKE OTHER TYPES OF LOANS 100.0 Term loans to businesses 100.0 Consumer instalment loans 100.0 Single family mortgage loans 100.0 Multi-family mortgage loans 100.0 All other mortgage loans Participation loans with correspondent banks 100.0 100.0 Loans to brokers 2/ 0.0 0.0 0.0 0.8 0.0 0.8 1.6 6.3 3.2 0.8 3.3 4.8 4.0 4.0 65.9 62.4 45.2 74.8 62.1 66.2 75.0 27.8 32.0 47.6 21.1 33.1 28.2 17.8 For these factors, firmer means the factors were considered more important in making decisions for approving credit requests, and easier means they were less important. 0.0 2.4 6.4 0.0 0.0 0.8 1.6 SA - 5 TABLE 2 NET NUMBER OF BANKS REPORTING EASIER LENDING PRACTICES 1/ May 15, 1967 Feb. 15, 1967 LENDING TO NONFINANCIAL BUSINESSES Terms and Conditions Interest rates charged Compensating or supporting balances Standards of credit worthiness Maturity of term loans 88 -3 100 - 3 -12 -12 4 4 Reviewing Credit Lines or Loan Applications Established customers New customers Local service area customers Nonlocal service area customers 18 29 15 5 19 51 23 14 Factors Relating to Applicant 2/ Value as depositor or source of collateral business Intended use of the loan -8 17 - 7 17 53 -3 -6 7 66 - 6 -13 1 27 39 66 21 25 30 17 34 31 55 6 19 29 23 LENDING TO "NONCAPTIVE" FINANCE COMPANIES Terms and Conditions Interest rate charged Compensating or supporting balances Enforcement of balance requirements Establishing new or larger credit lines WILLINGNESS TO MAKE OTHER TYPES OF LOANS Term loans to businesses Consumer instalment loans Single family mortgage loans Multi-family mortgage loans All other mortgage loans Participation loans with correspondent banks Loans to brokers 1/ 2/ Survey of Lending Practices at large banks reporting in the Federal Reserve Quarterly Interest Rate Survey. 133 banks reported in the February Survey and 126 in the May Survey. For these factors, firmer means the factors were considered more important in making decisions for approving credit requests, and easier means they were less important. SA - 6 TABLE 3 COMPARISON OF SELECTED RESPONSES IN THE MAY AND FEBRUARY SURVEYS May 15, 1967 Survey Total number of banks STRENGTH OF DEMAND FOR COMMERCIAL AND INDUSTRIAL LOANS Compared to three months ago stronger unchanged weaker Compared to three months ago stronger unchanged weaker LENDING TO NONFINANCIAL BUSINESSES Interest rates charged firmer unchanged easier 42 57 27 February 15, 1967 Survey Number of banks Stroneer 2 4 2 Unchanged 21 35 16 Weaker 18 18 9 Anticipated demand three months hence 21 7 13 16 7 34 10 15 2 Firmer Unchanged Firmer Unchanged Easier New customer firmer unchanged easier Nonlocal service area customer firmer unchanged easier LENDING TO "NONCAPTIVE" FINANCE COMPANIES Interest rates changed firmer unchanged easier 1 24 42 Establishing new or larger credit lines firmer unchanged 2 9 10 easier WILLINGNESS TO MAKE OTHER TYPES OF LOANS Term loans to businesses less unchanged more Single family mortgage loans less unchanged more Easier Less Unchanged More 2 17 16
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