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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 25, 1971 SUPPLEMENTAL NOTES The Domestic Economy Cyclical indicators. On the basis of more complete data, the increase in the Census leading indicator composite in April is now reported at 1.2 per cent, slightly lower than the figure given in the Greenbook. The May increase (preliminary) is still 0.6 per cent. The lagging composite index was adjusted upward somewhat but still reflects a 5.7 per cent decline from its September 1970 high to its February 1971 low. Leading series increasing in May were the manufacturing workweek, new orders for durable goods, housing permits and the ratio of price to unit labor cost. in Partly offsetting these were declines contracts and orders for plant and equipment, and industrial materials prices, common stock prices, and an increase in initial claims for unemployment insurance. The Domestic Financial Situation Bank credit. Additional data from the weekly reporting banks continue to suggest that loan growth in June at all banks will be modest, and that business loans may show virtually no growth after allowance for seasonal adjustment. -2- Mortgage market. Mortgage commitment activity increased further during April at mutual savings banks in New York State. Estimated new commitments were approved at a record seasonally adjusted pace, and outstanding commitments approached the previous peak attained in early 1969. Altogether, the seasonally adjusted backlog of mortgage commitments at both New York State savings banks and all S&L's reached another new high, nearly double the year-earlier level. MORTGAGE COMMITMENTS OUTSTANDING AT THRIFT INSTITUTIONS 1/ (Billions of dollars, seasonally adjusted) N.Y. State Savings Banks Date S&L's 1970 - High Low 8.1 (Dec.) 5.2 (Mar.) 2.6 (Jan.) 1.8 (Oct., Nov.) 5.8 2.2 May Both Thrift Institutions 10.1 (Dec.) 7.7 (Mar.) 8.0 1971 January 8.3 2.1 10.4 February 8.9 2.3 11.2 March 10.1 2.5 12.6 April 11.1 2.8 13.8 May 12.3 3.1 15.4 Home Federal from in process, 1/ Based on data, including loans Loan Bank Board and Savings Banks Association of New York State. CORRECTIONS: Page III-2, Table 1, line 11, change in U.S. Govt. cash, the correct figure for the 1970 H2 should be $3.7 billion. Lines 4, 5, 6, and 7 should be indented under line 3. -3Confidential Until Published 6/25/71 Table A-1 COMPARISON OF NEW "NET LIQUIDITY BALANCE" WITH FORMER "LIQUIDITY BALANCE" FOR 1970 (in millions of dollars) 1970 1970 "Liquidity Balance" "Net Liquidity As published Balance" Revised data March 1971 1. Balance on goods & services +3,592 +3,592 +3,672 2. 3. Remittances & pensions U.S. Gov't grants & capital -1,410 -3,332 -1,410 -3,332 -1,387 -3,235 (+244) (+244) 4. (of which advance repayments) (+243) 5. 6. 7, 8. Long-term capital U.S. private Foreign except "special" Foreign "special" 1/ -5,781 +3,716 +176 -5,781 +3,716 -99 -5,233 +3,253 -95 9. BALANCE ON CURRENT ACCOUNT & LONG-TERM CAPITAL -3.038 -3,314 .- nf ... 2/ -1,378 +830 +273 -1,378 +830 10. 11. 12. 13. Short-term capital U.S. claims, "liquid" (excl. reserve assets) U.S. claims, "nonliquid" U.S. liabilities, "nonliquid" ) -1, ) +704 14. Errors & omissions -1,132 -1,132 -1,274 15. 16. 17. BALANCE BEFORE SDR ALLOCATION SDR allocation BALANCE AFTER SDR ALLOCATION -4-719 ;L867 -3,852 -4-721 +af7 -3 R8& -4,715 .+867 -3,848 +2,477 +2,477 +2,477 FINANCED BY 18. U.S. reserve assets, decrease(+) 19. 20. Other "liquid" claims, decrease(+) Liquid liabilities to reserve holders and others, increase(+) Other liabilities to reserve holders, decrease(-) 21. +273 +1,377 ... +1,377 -275 . (+420) +145 +1,371 MEMORANDUM ITEMS: 22. 23. Total Special Transactions 3/ Balance before SDR allocation & before special transactions ... -4,866 +148 -4,863 1/ The figure for special transactions in column 1 differs from that in column 2 because the decrease in "other liabilities to reserve holders" (line 21) is now treated as a negative financing item whereas before it was a special transaction enlarging the deficit. 2/ Now treated as a financing item (line 19). 3/ Sum of lines 4 and 8. CONFIDENTIAL (FR) (until published) June 25, 1971 Table A-2. U.S. BALANCE OF PAYMENTS (in millions dollars, seasonally adjusted) Source Years 1970 Qtr.2 Qtr.3 Qtr.4 1971 Qtr.1 +1,045 -362 -757 +995 -359 -838 +670 -351 -895 +1,051 -351 -1,031 -1,925 +926 -1,128 +632 -1,492 +1,354 -1,237 +981 -1,692 +607 -3,038 -1,297 -570 -340 -832 -693 +91 -1,378 +830 -270 +163 -315 +151 -245 +124 -548 +392 -100 0 SCB June 1971 1/ 1969 1970 Qtr.l +2,011 -1,266 -3,837 +3,592 -1,410 -3,332 +881 -338 -841 -4,855 +5,068 -5,781 +3,892 # 26 -2,879 # 42,45 T.3 # 51 Balance on goods & services T.1 # 11 Remittances & pension T.3 # 31,32 U.S. Gov't grants & capital T.3 # 30,33 Long-term capital U.S. private T.3 # 39,40,41,44 Foreign T.3 # 48,49,50,52,55 7. BALANCE ON CURRENT ACCOUNT & LONG-TERM CAPITAL T.1 -1,4 8. 9. 10. Short-term capital, nonliquid U.S. nonliquid claims U.S. nonliquid liabilities 11. 12. Errors & omissions SDR allocation T.3 T.3 # 64 # 63 -2,603 -- -1,132 +867 -62 +217 -430 +217 -433 +217 -207 +216 -1,268 +180 13. NET LIQUIDITY BALANCE T.1 # 33 -6,084 -3,852 -1,250 -945 -679 -977 -2,604 14. 15. 16. Short-term capital, liquid U.S. liquid claims U.S. liabilities to commercial banks U.S. liabilities to other private T.3 # 43,46 T.1 # 39 +124 +9,166 -504 +273 -6,507 +265 +257 -1,863 -9 -81 -441 +65 -15 -1,315 -68 +112 -2,888 +277 -232 -3,025 +338 T.1 # 40,41 +2,702 -9,821 -2,865 -1,402 -2,077 -3,476 -5,52 -1,187 +2,477 +264 +805 +584 +824 +682 -517 +7,619 +3,021 +97 +1,738 +2,763 +5,065 -998 -275 -420 +500 -245 -111 -224 17. 18. 19. 20. 21. 22. T.3 OFFICIAL RESERVE TRANSACTIONS BALANCE T.I Financed by U.S. reserve assets, decrease (+) Liquid liabilities to foreign official agencies, increase (+) # 42 Nonliquid liabilities to foreign official reserve holders, decrease (-) 1/ Survey of Current Business, June 1971, U.S. Balance of Payments, Table 1 and Table 3. SUPPLEMENTAL APPENDIX A: THE U.S. BALANCE OF PAYMENTS: REVISED PRESENTATION* Beginning in the June 1971 Survey of Current Business the presentation of the U.S. Balance of Payments accounts will be revised. Some of the disaggregated components of the accounts have been redefined and two new summary balances have been derived. The new balances are the "Balance on Current Account and Long-term Capital" and the "Net Liquidity Balance." The definition for the "Official Reserve Transactions Balance" remains unchanged. The old 'Liquidity Balance" has been dropped. Unlike other macro-measures, such as the Gross National Product, the "balance" of a set of international transactions involves a selection of relevant items rather than a simple summary or averaging of all available data. No one "balance" can in itself measure an absolute degree of deviation from some "equilibrium" position. The summary balances are presented merely to provide a not-too-misleading starting point for discussions of whether the underlying balance of payments position is changing in a desirable direction or not. Presentation of the basic data has been reorganized so that the various summary balances can be derived directly from the disaggregated listing of transactions in the main balance of payments tables, with and without seasonal adjustment (Tables 2 and 3 in the June 1971 Survey of Current Business). A new summary table has been introduced (Table 1 in the Survey) which shows the relationship of each balance to the others. See Table A-2 at the end of this Appendix. The newly presented "Balance on Current Account and Long-term Capital" is intended to give a rough indication of trends in the U.S. balance of payments apart from movements of short-term capital. This balance is the sum of net export of goods and services, remittances and pensions, U.S. Government grants and capital, and the net flow of U.S. and foreign long-term capital (except to and from foreign official reserve holders.) See Table A-1, below, lines 1 through 9. Equally new is the presentation of a "Net Liquidity Balance" which is intended to be a broad indicator of trends apart from movements of the more liquid types of short-term capital. This balance includes not only those items that went into the balance on current account and long-term capital but also changes in the nonliquid shortterm claims and liabilities reported by private U.S. concerns, net * Prepared by Kathryn A. Morisse, Economist, Balance of Payments Section, Division of International Finance. errors and omissions, and the allocation of special drawing rights (SDRs). See Table A-1, line 1-17. Unfortunately, insofar as changes in errors and omissions reflect variations in liquid capital outflows, their inclusion detracts from the usefulness of this balance as a measure of what it is intended to measure. The new "Net Liquidity Balance differs from the old "Liquidity Balance" in two ways. First, changes in short-term liquid U.S. claims are now treated symmetrically with changes in U.S. liquid liabilities -both are "below the line" for the "Net Liquidity Balance," being considered to be part of the financing of that balance. See Table A-1, lines 11 and 19. Since the changes in private liquid claims were above the line for the old "Liquidity Balance," a simultaneous increase in such claims and in U.S. liquid liabilities increased the old "Liquidity" deficits but such a simultaneous change does not affect the new "Net Liquidity Balance." The second difference relates to the treatment of certain U.S. liabilities to foreign official reserve holders 1/ that were put into the nonliquid category in former years in order to have a favorable impact on the old "Liquidity Balance." The nonliquid liabilities involved in this type of special financial transaction have now been moved below the line and a change in such liabilities therefore See Table A-1, lines 8 has no impact on new "Net Liquidity Balance." and 21. The "Official Reserve Transactions Balance" is reached by adding to the "Net Liquidity Balance" changes in short-term liquid private U.S. claims and liabilities. See Table A-2, lines 13 through 18. The definition of this last balance is unchanged. It is the balance financed by changes (decreases) in U.S. official reserve assets plus changes (increases) in U.S. liquid and nonliquid liabilities to foreign official reserve holders. This balance is a rough proxy for exchange market pressures on the dollar. The revised presentation of the balance of payments accounts reflects the results of a study begun in the fall of 1970 by the Interagency Committee on Balance of Payments Statistics that was set up by the Office of Management and Budget in recognition of the growing dissatisfaction with the balances as previously presented -particularly the old "Liquidity Balance." 1/ The Survey of Current Business does not use the term "reserve holders" but we find it useful to distinguish such holders from other foreign government agencies which hold claims in the United States such as military export prepayment accounts. INTEREST RATES 1971 Highs Lows June 7 June 24 4.82 (6/2) 4.96 (6/23) 4.44 5.00 5.00 4.60 5.50 6.92 5.10 5.38 5.12 (6/2) 5.26 (6/2) 5.50 5.29 4.70 5.12 (e) Short-Term Rates Federal funds (weekly averages) 4.96 (6/23) 3.29 (3/10) 3-month Treasury bills (bid) Bankers' acceptances Euro-dollars Federal agencies Finance paper 5.02 (6/15) 3.22 (3/11) 5.50 8.00 5.10 5.50 (6/24) (6/1) (6/24) (1/5) 3.88 4.94 3.27 3.62 (3/10) (3/17) (2/24) (3/15) CD's (prime NYC) Most often quoted new issue 5.50 (6/24) 3.62 (3/24) Secondary market 5.62 (1/6) 3.80 (3/17) 6-month Treasury bills Bankers' acceptances Commercial paper (4-6 months) Federal agencies CD's (prime NYC) Most often quoted new issue Secondary market 5.22 5.62 5.75 5.59 (6/16) (6/24) (1/7) (6/24) 3.35 4.00 4.00 3.53 (3/11) (3/10) (3/29) (3/10) 5.75 (6/24) 4.00 (3/24) 5.80 (6/24) 3.70 (3/3) 1-year Treasury bills (bid) 5.61 (6/24) 3.45 (3/11) CD's (prime NYC) Most often quoted new issue 5.75 (6/24) 4.38 (3/3) Prime municipals 3.45 (6/7) 2.15 (3/24) 7.57 4.36 (6/4) 5.38 5.03 5.62 (e) 5.50 4.82 (6/4) 5.59 5.38 (6/2) 5.50 (6/2) 5.75 5.80 5.08 5.61 5.50 (6/2) 3.20 (6/4) 5.75 3.40 Intermediate and Long-Term Treasury coupon issues 5-years 20-years 6.76 (6/15) 4.74 (3/22) 6.56 (6/15) 5.69 (3/23) 6.36 6.26 6.46 Corporate Seasoned Aaa Baa 7.69 (6/2) 8.93 (1/5) 7.05 (2/16) 8.28 (2/16) 7.68 8.72 7.62 8.79 8.23 (5/20) 6.76 (1/29) 7.79 (6/3) 7.84 Municipal Bond Buyer Index Moody's Aaa 6.23 (6/24) 5.00 (3/18) 5.80 (6/24) 4.75 (2/11) 5.70 (6/3) 5.50 (6/4) 6.23 5.80 Mortgage--implicit yield in FNMA auction 1/ 8.18 (6/1) 8.18 (6/1) 8.15 (6/14) New Issue Aaa 7.43 (3/1) 6.61 1/ Yield on 6-month forward commitment after allowance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year e--estimated. loan amortized over 15 years. -4- International Developments U.S. foreign trade. The U.S. trade data for May, to be released June 28, will show another large import balance, about equal to the $300 million deficit (balance of payments basis -not at an annual rate) in April. Imports in May increased by 6 per Exports in May also advanced by cent above the record April level. about the same amount but from a relatively low April value. For January-May the trade balance was an import balance of about $300 million (not at an annual rate). This compares with an export surplus of $650 million in the first five months of 1970 and a $2 billion surplus in calendar 1970. The rise in imports from April to May was largely in mineral fuels and other industrial materials -- particularly steel, but also in imports of lumber, textiles and iron ore. Imports of transportation equipment also rose, probably automobiles from Canada. The principal increase in May exports was in transportation equipment, reflecting greater shipments of commercial aircraft, and automobiles to Canada. Exports of machinery picked up from the relatively low April value. Shipments of agricultural commodities, mainly wheat, also rose moderately in May. June 25, 1971 U.S. MERCHANDISE TRADE, BALANCE OF PAYMENTS BASIS (billions of dollars, seasonally adjusted annual rates) Exports Imports Balance Quarterly 1970 - 1 2 3 4 41.0 42.3 42.8 41.8 38.9 39.3 40.0 41.3 2.1 3.0 2.8 0.6 1971 - 1 44.1 43.0 1.1 Monthly 1971 - January February March April May 43.9 43.6 45.1 41.4 44.2 44.1 42.4 42.5 44.9 47.6 -0.2 1.1 2.6 -3.5 -3.4 Note: Details may not add to totals because of rounding.
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