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Content last modified 6/05/2009.
CONFIDENTIAL
(FR)
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
By the Staff
Board of Governors
of the Federal Reserve System
June 23, 1971
TABLE OF CONTENTS
Page No.
Section
I
SUMMARY AND OUTLOOK
Nonfinancial . . . . .
. .
. . . . . . . . . . . . .
. . . . . . . . . .
Financial
Financial.....................
Balance of payments.
. . . .
. . . . . . . .
. . . . . . .
. .
.
1
.
3
-- 3
. . .
. . ....
. . . .
- 5
.
THE ECONOMIC PICTURE IN DETAIL
II
Domestic Nonfinancial Scene
Gross national product
....... a
..
.
.. .
. .
. . .
Industrial production.
. . ....
. . . ......
Retail sales
. . . . . . . . .
Unit auto sales. . . ..
Inventories.................
.
.
Manufacturers' orders and shipments.
. . . . . . . . .
Cyclical indicators. . .
Residential construction and real estate . .
. . . . ........
.
.
.
Labor market . . .
. . . . ..
Personal income. . . . . . ... .
Wages and collective bargaining. . . . . .
. . . . . . .....
Consumer prices. . . . .
-
. ..
. . . . .
.
. . . .
.
. .. ..
.....
. . . ...
. . . .
. . . . .
.
.
.
. .
..
.
Domestic Financial Situation
Flow of funds, second quarter. . . . . . . .
Bank credit. . . . . . . . . . . . . . . . .
Nonbank depositary intermediaries.. . . . .
..
Mortgage market. . . . . . . . . . . . .
Corporate and municipal securities markets .
.
. .....
Government securities market .
Other short-term credit markets. . . . . ..
. . . .
Federal finance. . , .. . . . . .
- 9
-10
-10
-12
-13
-15
-1
-19
-20
-21
III
. . . .
. . . .
. . . .
.
. .
.
.
.
.
. .
.
..
.
.
.
. . . .
. . .
.
. . ..
.
.
.
International Developments
- 1
- 9
-13
-18
-21
-25
-27
-29
IV
.
. .
. . ..
Foreign exchange markets . . . . . . .
Euro-dollar market . . . . . . . . . . . . . . . . . . .
............
U.S. balance of payments . . .
. . . . . . . . .
.
. . .
U.S. foreign trade . ..
- 1
-4
Interest rate movements in major industrial countires. *
-10
- 8
I- 1
SUMMARY AND OUTLOOK
Nonfinancial
The staff continues to expect real GNP in the second quarter
to increase at an annual rate of around 3 per cent, less than half the
rise in the first quarter and below the trend rise in potential GN.
Residential construction activity is still moving up strongly; housing
starts increased somewhat further in May from an already advanced level
and building permits rose sharply.
Inventory investment is apparently
up from the very low first quarter rate.
has emerged in other sectors.
But no new expansive thrust
The labor market remains sluggish.
Initial
unemployment claims have turned up in recent weeks and insured unemployment has continued to rise.
A sizable and widespread increase in industrial production in
May may be followed
by a smaller rise in
June.
Auto assemblies in June
are scheduled at the May rate and raw steel output is declining somewhat
more than seasonally, with stocks large and steel consumers apparently
downgrading chances
a whole,
of a prolonged strike.
industrial production is
For the second quarter as
estimated to be up at an annual rate
of about 4 per cent.
A strengthening of retail
sales
in March and April was followed
by declines in May and apparently in the first half of June.
For the
quarter as a whole, however, the increase from the first quarter average
is likely to be appreciable.
Unit sales of domestic autos were down
sharply in the first 10 days of June, reflecting mainly the ending of
sales incentive contests.
I-
2
Total new orders for durable goods and for the capital equipment
category rose in May, but both remained below the levels of the first
quarter.
Book values of manufacturers' and trade inventories increased
appreciably in April, as in March; the bulk of the April rise was in lines
other than autos and
steel, in contrast to the pattern of earlier months
this year.
Consumer prices rose sharply in May following a marked slowing
in the first four months of the year.
The rise in food prices slowed,
but there were widespread increases in prices of other goods and services.
A much smaller decline in mortgage interest rates also provided less of
an offset than in earlier months this year.
Outlook.
The staff projection of an increase of $20 billion
in current dollar GNP this quarter is virtually unchanged from the
projection of three weeks ago.
Except for a slight
upward revision in
business fixed investment, the major demand sectors also have not been
changed.
A number of modifications, however, have been introduced into
the staff projections for the second half of the year.
We no longer
assume a steel strike, which reduces somewhat the earlier disparity
between GNP expansion in the third and fourth quarters.
The working
off of steel stocks will be more prolonged--probably extending at least
through year-end--than if a strike occurs.
A second modification, serving
I-3
to raise GNP expansion in the third quarter, reflects the larger military
pay package passed by the Senate.
A secondary effect of the larger in-
crease in military pay is an expected larger increase in consumer spending.
The increase in current dollar GNP is now expected to average
close to $22 billion in the last two quarters, virtually unchanged on
balance from our previous projection.
But recent and prospective wage
and price developments suggest that our earlier expectations as to the
GNP price deflator have been too optimistic.
Consequently, we have
raised our projections--the fourth quarter increase, at an annual rate
of about 4-1/2 per cent, represents only a little slowing in the pace
of inflation, and compares with about 4 per cent in our last projection.
Real GNP is now projected to rise at an annual rate of only
3-1/4 per cent over the last two quarters.
The unemployment rate is
expected to edge up to about 6.5 per cent in the fourth quarter and
capacity use in manufacturing to change little from the low rate prevailing currently.
Financial
While interest rates have risen on balance since the last
Committee meeting, most recently yields on Treasury coupon issues and
corporate bonds have receded from their highs for the month.
A stronger
demand for corporate bonds developed at mid-month as the forward calendar
suggested some tapering of new issue volume.
This does not seem to re-
flect a shift of financing to other markets since the business sector's
demand remained small in both the commercial paper market and at banks.
I- 4
Following the May increase, business loan expansion at banks in June
has apparently been modest at best, and major banks have not, at this
writing, followed First Pennsylvania Bank in raising the prime rate.
Yields on longer-term tax-exempt bonds remained under upward
pressure as banks continued to emphasize acquisitions of shorter-term
issues.
Other investors in State and local securities also tended to
reduce their purchases in anticipation of higher yields.
Yields on
home mortgages in the secondary market leveled off in early June, following a sharp May run-up, as many market participants continued to be concerned about the future availability of funds; and rates on conventional
mortgages rose in May for the first time in nearly a year.
Outlook.
Assuming continuation of the recent higher Federal
funds rate, the expected relatively large volume of new securities issues-including a much more than seasonal $11 billion demand for funds by the
Treasury between the end of June and mid-August--may well constrain the
size of the latest recovery in corporate and Treasury bond prices, and
could possibly generate some further weakening in the tax-exempt market
in coming weeks.
The outlook for a change in the prime rate is
uncertain.
Current loan demands do not appear large, and the staff expects such
demands to remain weak to moderate into the summer.
less might move the prime rate in
closer alignment with other short-
term rates, as was the case in April.
been discounted by the market,
Banks neverthe-
A rise in the prime rate has largely
although a general move to 6 per cent,
I-5
rather than 5-3/4 per cent, might lead to some further upward adjustment in market rates.
The mid-year reinvestment period for banks and other thrift
institutions is being viewed with caution by some lenders.
The current
AT&T preferred stock offering, in particular, represents an attractive
investment alternative for savers.
More generally, however, rate re-
lationships do not suggest a high rate of withdrawal during the reinvestment period.
But the rate of savings inflows to thrift institu-
tions over the summer, while expected to remain fairly large by historical standards, will probably decline somewhat further.
Mortgage markets should receive support, however, from the
continued high level of institutional liquidity and the Home Loan Banks'
announced intention to provide assistance to S&L's in maintaining mortgage credit flows.
Nevertheless, the expected slowing of savings in-
flows this summer could contribute to a further increase in the contract
rate on conventional mortgages.
And the continued large discount on
government insured mortgages has increased the probability of HUD action
to lift the FHA/VA ceiling rate.
Balance of payments
Revised data for net exports of goods and services in the first
quarter indicate a somewhat larger surplus than the Commerce Department
had previously estimated.
The difference is due, however, mainly to
temporary factors affecting deliveries on military sales contracts and
to a decline in interest payments.
The merchandise trade position
I - 6
continues to be very unsatisfactory; preliminary indications are that
in May imports may have continued to exceed exports of nonmilitary goods,
as they did in April.
Data for the over-all balance of payments in the first quarter
of 1971 (confidential until published next week) show, as had been expected, a relatively large outflow of U. S. corporate capital and very
large unaccounted transactions ("errors and omissions").
Differences
between interest rates here and abroad were wide and increasing until
mid-March, and before the end of the quarter expectations were beginning
to develop of an appreciation of the German mark and perhaps other
currencies.
After the flood of funds into marks and other currencies at
the end of April and in early May, the Bundesbank stayed out of the
exchange market from May 5 to June 1.
Since then it has been buying
marks (selling dollars) at exchange rates that moved up gradually to
a level about 4-1/2 per cent above par (and rose somewhat higher this
week).
The Bundesbank's spot sales of dollars have exceeded its intake
through maturing forward contracts.
Although Japan has continued to gain
reserves rapidly, the central banks of the major industrial countries in
the aggregate have apparently had a small decline in their total reserves
since mid-May.
This corresponds to the fact that the U. S. official
settlements deficit has been small in that period.
The U. S. deficit on the liquidity basis has continued large,
according to incomplete preliminary indicators which show considerable
variation from week to week.
In addition to the underlying deficit on
I -7
current and long-term capital transactions, a movement by means of
commercial leads and lags into the Japanese yen may be taking place.
Also, net outflows to Europe of short-term funds of nonbank businesses
and individuals may be continuing in response to the existing differences in interest rates, particularly in relation to the Euro-dollar
market.
Interest rates in most of the major national markets abroad
are lower now than they were in March, and there has been a considerable
rise in U. S. rates.
This rise in U. S. rates was accompanied, however,
by an even larger rise in Euro-dollar rates during and after the run into
marks.
After receding from their peaks, Euro-dollar deposits of 1 month
to a year now carry interest rates in the 6-3/4 to 7-1/2 per cent range.
While the Euro-dollar market may thus still be attracting funds
of businesses and individuals, the reflux from the German mark has
produced relatively easy conditions at the very short end of that
market.
In the past two weeks the interest rate on overnight Euro-
dollars has averaged well below 5 per cent.
This has been a factor
in an increase in recent days in U. S. banks' outstanding borrowings
from their foreign branches.
The long-continued run-off in the banks'
liabilities to branches stopped earlier this month and there had already
been some increases, possibly reflecting an attitude of caution with
regard to maintaining sizable liquid
on head offices) at the branches.
asset positions (including claims
With the reversal of the run-off in
liabilities to branches, the official settlements balance has shown more
favorable results than the liquidity balance in recent weeks.
I-8
We may see some tightening in the Euro-dollar market as the OFDI
quarter-end reporting date approaches, bringing repatriations of U. S.
corporation funds. Further ahead, there will be a period of uncertain
length during which the reflux from the German mark will continue, with
benefit to the U. S. official settlements balance if flows to other
countries through the Euro-dollar market or directly from Germany or
the United States are not too large. (How the net flow will be affected
in July by the maturing of a large volume of DM forward contracts that
month is uncertain.)
Within Germany, a net outflow from the mark will enable the
authorities to squeeze the liquid asset position of the banking system,
in their effort to cool off the economy and check the continuing inflation of prices and costs.
Eventually, there may be favorable repercus-
sions for the U. S. balance of payments both from the appreciation of
the German mark and from a possible decline in German interest rates.
In the more immediate future, however, the efforts to restrain the
growth of demand in Germany will
factor,
have to be counted as an adverse
tending to hold down U. S.
net exports.
June 22,
I --
T-
1971
1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Feb.
1971
March
April
May
Per Cent Change* From
Year
3 mos.
1 mo.
ago
ago
ago
Civilian labor force (mil.)
Unemployment rate (%)
Insured unempl. rate (%)
83.4
5.8
3.8
83.5
6.0
3.9
83.8
Nonfarm employment,
Manufacturing
Nonmanufacturing
70.6
18.7
51.9
70.7
18.7
52.0
70.7
18.7
52.0
70.8
18.7
52.1
0.2
0.3
0.2
0.2
-0.2
0.5
0.0
-4.5
1.7
165.2
163.0
164.6
173.0
167.8
165.5
163.4
166.2
170.5
168.0
166.2
163.4
167.1
169.5
169.3
167.3
164.3
168.3
169.9
170.3
0.7
0.6
0.7
0.2
0.6
1.3
0.8
2.2
-1.8
1.5
-1.0
-2.0
3.1
-10.0
-0.1
72.8
72.9
72.8
n.a
--
--
payroll (mil.)
Industrial production (57-59=100)
Final products, total
Consumer goods
Business equipment
Materials
Capacity util. rate, mfg.-
84.2
6.2
4.2
6.1
4.0
0.5
1.0
Wholesale prices (1967=100) 1
Industrial commodities (FR)
Sensitive materials (FR)
Farm products, foods & feeds
112.8
112.3
109.9
113.6
113.0
112.6
111.1
113.4
113.3
113.1
113.1
113.3
113.8
113.4
113.3
114.3
0.4
0.3
Consumer prices (1967=100)1/
Food
Commodities except food
Services
119.4
115.9
115.2
126.6
119.8
117.0
115.5
126.6
120.2
117.8
115.8
126.8
120.8
118.2
116.6
127.5
0.5
3.40
3.55
141.65
0.3
1.5
0.6
1.4
1.2
1.4
0.3
0.7
0.6
140.02
3.39
3.53
139.92
100.76
101.39
100.62
101.81
1.2
1.0
830.4
836.8
841.4
847.4
0.7
2.0
31.6
8.3
8.8
32.3
8.6
8.9
32.6
8.3
8.9
32.3
8.4
8.9
12 leaders, composite (1967=100)
119.9
122.4
124.1
n.a
Selected leading indicators:
2/
Housing starts, pvt. (thous.)Factory workweek (hours)
Unempl. claims, initial (thous.)
New orders, dur. goods, ($ bil.)
Capital equipment
Common stock prices (41-43=I0)
1,754
39.5
284
31.9
8.8
97.11
1,959
39.9
297
31.8
8.9
99.60
1,899
Personal income ($ bil.)2/
Retail sales, total ($ bil.)
Autos (million units) 2/
GAAF ($ bil.) 3/
- -
3.38
3.52
39.7
283
30.6
8.4
103.04
1,931
39.9
304
31.2
8.5
101.64
Sased on unrounded daa. 1/ Not seasonally adjusted. 2/
Gen'l. merchandise, apparel, and furniture and appliances.
Per cent calculated to April 1971.
6/ Sign reversed.
7.9-
0.2
0.9
3.35
3.50
139.'69
Hourly earnings, pvt. nonfarm ($)
Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)
Net spend. weekly earnings, mfg.
(3 dependents 1967 $) 1/
1.94/
4.9
4/
3.6-
-0.8
2.0
-0.6
1.4
1.7
0.56
0/
-7.61.9
2.2
-1.4
4.7
10.1
1.0/
-7.2-2.0
-2.6
4.7
Annual rates.
4/ Actual figures.
55.5
0.3
3.24.1
0.7
33.6
I --
T - 2
SELECTED DOMESTIC FINANCIAL DATA
Averages
1970
1971
QIV
III
01
Week ended
June 16
May
April
Interest rates, per cent
Federal funds
3-mo. Treasury bills
3-mo. Federal agencies
3-mo. Euro-dollars
3-mo. finance co. paper
4-6 mo. commercial paper
6.71
6.33
6.67
8.34
7.42
7.85
5.57
5.35
5.50
7.46
6.12
6.28
3.86
3.76
3.78
5.50
4.48
4.57
4.15
3.86
4.00
5.92
4.27
4.57
4.63
4.14
4.37
7.04
4.69
5.10
4.89
4.85
4.99
7.19
5.13
5.43
Bond buyer municipals
Aaa corporate-new issues
20-year Treasury bonds
FHA mortgages, 30-year
6.33
8.51
6.96
9.06
5.92
5.25
7.33
5.98
5.37
7.57
6.00
7.37
5.91
6.01
6.32
n.a.
5.87
7.93
6.45
n.a.
8.26
6.57
8.76
--
1971
April
1970
01I
OQIV
QI
19.1
24.4
24.1
17.2
6.1
32.2
9.3
13.9
25.9
20.3
9.8
1.8
6.6
9.4
11.0
11.0
17.0
May
Change in monetary aggregates
(SAAR, per cent)
Total reserves
Nonborrowed reserves
Credit proxy
Credit proxy + nondep. funds
Money supply
Time and savings deposits
Deposits at S&L's and MSB's
Bank credit, end-of-month i12
Treasury securities 2/
Other securities 2/
Total loans 1i//
Business 1/2/
15.1
8.3
3.4
21.8
11.6
8.5
6.2
36.5
1.2
-4.9
10.9
OV
01_
8.9
27.3
23.3
12.2
19.8
27.9
6.3
1.0
12.4
11.4
7.7
16.3
14.5
13.4
11.7
16.7
12.9
18.2
1971
April
1970
QTIT
17.0
2.7
9.7
12.2
5.3
9.3
10.7
21.8
-0.3
-23.5
20.9
-2.4
ay
Change in commercial paper
($ millions)
Total (SA)
Bank-related
(NSA)
-4,232
-2,985
-760
-2,269
1969
2nd Half
-433
-2,581
-657
-4'6
1971
1970
oII
May
I
May
New security issues
(NSA, $ millions)
Total corp. issues
Public offerings
State and local government
bond offerings
Fed. sponsored agency debt
(change)
Fed. govt. debt (change)
13,172
10,770
7,977
6,715
10,468
9,185
3,909
3,509
12,190
10,675
3,400 e
2,900 e
5,446
4,109
3,728
996
6,642
1,900 e
5,586
9,811
3,635
1,982
1,542
-6,395
187
1,452
-1,,031
1,575
-413 e
2,489 e
e - Estimated.
n.a. - Not available.
p - Prelimiaary.
NSA - Not seasonally adjust ed.
SAAR - Seasonally adjusted annual rate.
1/ Adjusted for loans sold to bank affiliates.
Credit figures have been revised beginning QIV, 1970 to reflect adjustments to the
2/
December 1970 Call.
6/23/71
I -- T - 3
U.S. Balance of Payments
In millions of dollars; seasonally adjusted
4.
-'---
-
1970
-
1971
1970_
Goods and services, net 1/
Trade balance 2/
Exports 2/
Imports 2/
Service balance
Year
3,592
2,110
41,980
-39,870
1,482
Remittances and pensions
Govt. grants & capital, net
-1,410
-3,332
-351
-1,031
U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims--"liquid"
"
"
"
other
Nonbank-reported claims--"liquid"
"
"
"
other
-6,886
-2,024
-4,445
-942
-1,357
-362
-72
-50
Foreign capital (excl.
-1,519
969
697
822
347
-2.08,0
-6,507
86
179
222
1,666
-3,025
70
268
-28
86
-1,449
62
-75
7,344
4,841
1,720
7,619
-275
5,065
1,787
-67
-119
-832
392
-940
reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues 3/
Other U.S. securities (excl. U.S. Treas.)
Liabilities to:
Commercial banks abroad, "liquid"
Other private foreign, "liquid"
Intl. & regional institutions, "liquid"
"
"
"
, nonliquid
Banks and others, nonliquid
Foreign official reserve claims
"Liquid"
Other
U.S. monetary reserves (increase, -)
Cold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies
3,344
787
16
389
2,152
-1,132
Errors and omissions
BALANCES (deficit -) 4/
Official settlements, S.A.
i"
"
, N.S.A.
-10,688
Net liquidity, S.A.
"
. N.S.A.
-4.719.
*
Only exports and imports are seasonally adjusted.
1/
Equals "net exports"
in the GNP,
1,051
272
11,032
-10,760
779
-160
-
Feb.*
Mar.*
Apr.*
95
3,630
-3,535
215
3,755
-3,540
-290
3,450
-3,740
-21
-77
-67
-59
-56
-18
-190
-55
-129
76
-144
-38
-23
50
75
392
32
-224
862
109
125
255
373
-32
-1
165
1
164
-479
65
130
2,456
2,545
-89
2, 375
192
76
25
20
71
35
38
2,450
-75
-2
-1
-1, 268
-5,703
-5,403
-2,784
-2.638
-1,885
-2,648
-2,410
-287
-1.449
-2,164
except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ New issues sold abroad by U.S. direct investors.
4/ Excludes allocations of SDRs':$867 million on Jan. 1, 1970; and $717 million
on Jan. 1, 1971.
THE ECONOMIC PICTURE IN DETAIL
Domestic Nonfinancial Scene
Gross national product.
The economic situation appears to
be developing this quarter about as we had expected, a modest rate of
economic growth is occurring, fueled mainly by strength in residential
construction activity and some expansion in non-auto retail sales.
Steel stock-piling also has been a factor contributing to overall
inventory accumulation, although less so than expected earlier.
Moreover, the incoming economic news does not suggest any
major change in the underlying outlook for the remainder of the year.
We continue to anticipate relatively moderate gains in output in the
second half, and our GNP projection for the year as a whole remains
only a little above the $1050 billion level.
A more satisfactory rate of economic growth now appears
likely in the first half of next year, however, sparked by a rise
in the minimum wage, increases in Federal pay, and a rise in social
security benefits.
The beginnings of a rebound in business fixed
capital outlays and a more rapid rate of inventory investment also
appear probable after the turn of the year.
As will be detailed in
the staff presentation on Tuesday, we now anticipate first half 1972
increases in current dollar GNP averaging over $25 billion per quarter
and real growth to recover to about a 5 per cent annual rate.
II - 2
Our projection of GNP increase for the second quarter of
this year remains about $20 billion--only two-thirds the rise of the
preceding quarter, when the rise was temporarily inflated by the
post-strike rebound in auto sales.
In real terms, growth of GNP in
the second quarter is projected at slightly over 3 per cent, annual
rate.
(Changes
in
GNP AND RELATED ITEMS, 1971
seasonally adjusted totals at annual rates)
First Quarter
Second Quarter
Proj. of
Current
6/2/71
------- Billions of dollars-------GNP
Final sales
Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State and local purchases
Inventory change
30.8
33.0
19.5
16.4
20.0
17.0
19.4
3.6
3.8
.7
.2
5.2
11.6
2.4
.9
- .8
- .7
3.1
11.8
2.4
1.4
- .8
- .8
3.1
-2.2
3.1
3.0
-------- Per Cent Per Year--------Real GNP
GNP deflator
1/
7.1
5.6 1/
Excluding effects of Federal pay increase,
2.9
4.7
3.2
4.6
4.6 per cent.
Housing starts through May are consistent with an annual
rate for the quarter in excess of 1.9 million units, indicating a
further strong rise in residential construction activity, although
by about $1 billion less than in the first quarter.
ments data suggest a slightly larger increase in
Recent ship-
capital expenditures
II -
than we had projected last time.
3
Our projections continue to indicate
smaller increases in the second quarter than the first for State and
local spending and declines in net exports and in Federal purchases.
The projection of the rise in personal consumption expenditures
for the quarter remains approximately as it was in the preceding
Revised figures indicate a somewhat larger increase in
Greenbook.
retail sales than had been indicated earlier for March and April,
but sales dropped back in May and were sluggish in early June.
Although
total unit auto sales have been averaging a respectable annual rate
of close to 10 million so far this year, sales of domestic-type models
have shown no tendency to climb above the 8.4 million rate of the
first quarter.
On the other hand, the expected signs of a moderate pickup
of inventory investment have been evident, following the first quarter
adjustment.
Inventory accumulation in the first quarter reflected
stockpiling of steel and rebuilding of auto stocks; in other sectors,
inventories were run down slightly on balance.
This situation began
to change toward the end of last quarter, and in April the book values
outside of autos and steel rose appreciably.
II - 4
GNP AND RELATED ITEMS, 1971
(Changes in seasonally adjusted totals at annual rates)
Third Quarter
Proj. of
6/2/71
Current
Fourth quarter
Proj. of
6/2/71
Current
-------- Billions of dollars---------GNP
Final sales
Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State & local purchases
Inventory change
18.5
22.0
21.0
24.1
24.5
19.0
22.5
20.1
13.0
1.4
.5
.0
2.9
4.2
14.1
1.4
.5
.0
3.9
4.2
13.0
1.3
.5
.0
.0
4.2
14.1
1.3
.5
.0
.0
4.2
-3.5
-3.1
5.5
2.4
----------Real GNP
GNP deflator
1/
2/
Per Cent Per Year---------
2.1
2.5
5.3
4.0
4.9 1/
5.5 2/
3.9
4.4
Excluding effects of Federal pay increase, 4.25 per cent.
Excluding effects of Federal pay increase, 4.5 per cent.
The outlook for GNP growth in the second half of the year
also remains about unchanged overall from the preceding Greenbook-with expected gains averaging over $20 billion a quarter.
However,
the quarterly pattern has been changed, and we have raised the third
quarter increase by $2-1/2 billion.
We are now assuming enactment
shortly of a military pay increase amounting to $2.7 billion, about
$1 billion larger than we had formerly estimated, and this should
also increase consumption.
Moreover, we believe that the odds have
shifted against the likelihood of a steel strike, and have not allowed
for one in the current projection.
Industry acceptance of something
II - 5
close to the settlements negotiated in the can and aluminum industries
would likely result in a somewhat smaller decline in inventory investment in the third quarter than we had projected earlier.
In the
absence of an August-September strike, however, the fourth quarter
GNP increase is expected to be some $2 billion smaller than we had
projected a month ago--primarily because excess steel stocks would
continue to be drawn down throughout the quarter.
Although GNP growth for the two quarters combined is about
the same as in the preceding projection, we have again raised our
estimate of the probable rise in the price deflator, and gains in
GNP for the period reflect more price and less real increase.
Because
of recent price increases, and the outlook for continued large wage
settlements, we now expect only a little easing of inflationary
pressures.
The rate of increase in the deflator in the fourth
quarter is projected at a 4-1/2 per cent annual rate, rather than the
4 per cent indicated in the preceding Greenbook.
Projected real GNP
growth, therefore, has been reduced somewhat, averaging 3-1/4 per cent
over the second half, and some further increase in unemployment seems
in prospect.
We expect that the pace of real GNP growth will accelerate
in early 1972, however, and the unemployment rate should begin to decline
from the 6-1/2 per cent rate we now anticipate for late this year.
- 6
II
CONFIDENTIAL - FR
June 23, 1971
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.)
1970
1971
Proj.
I
1972
1971
---------------- Projection-------------II
III
IV
I
II
854.6
852.1
1137.2
1128.2
873:6
671.6
686.4
103.0
289.9
293.5
701.3
105.5
296.1
299.7
717.2
108.5
302.7
306.0
152.1
40.9
107.5
3.7
3.7
157.4
42.1
108.7
6.6
6.6
163.4
42.9
111.5
9.0
9.0
Gross National Product
Final purchases
Private
Excluding net exports
976.5
973.1
752.6
749.0
1051.8
1049.1
813.7
811.0
1020.7
1019.3
790.6
787.3
1040.7
1036.3
805.4
802.9
1061.7
1060.4
821.4
818.9
1084.2
1080.5
837.3
834.8
Personal consumption expenditures
Durable goods
Nondurable goods
Services
616.7
89.4
264.7
262.6
665.8
99.8
281.4
284.7
646.4
97.5
272.8
276.1
658.2
98.2
278.5
281.5
672.3
100.5
284.3
287.5
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
135.7
29.7
102.6
3.5
2.9
147.9
38.6
106.5
2.7
2.7
142.4
35.8
105.1
1.4
1.2
149.1
38.2
106.5
4.4
4.4
147.9
39.6
107.0
1.3
1.3
Net exports of goods and services
3.6
2.7
3.3
2.5
2.5
Gov't. purchases of goods & services
Federal
Defense
Other
State & local
220.5
99.7
76.6
23.1
120.9
235.5
99.8
73.9
26.0
135.7
228.7
98.4
74.0
24.5
130.2
230.9
97.6
72.8
24.9
133.3
239.0
101.5
74.8
26.7
137.5
243.2
101.5
73.8
27.7
141.7
250.0
104.5
75.3
29.2
145.5
254.6
105.3
75.3
30.0
149.3
Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
724.1
134.9
741.3
141.9
732.7
139.3
738.5
140.9
743.2
142.5
750.7
144.4
759.6
146.3
769.3
147.8
801.0
540.1
684.8
7.3
858.9
578.0
737.2
52.1
7.1
830.7
560.6
714.3
49.0
6.9
852.2
571.2
733.6
56.2
7.7
868.1
584.3
745.2
53.3
7.2
884.6
595.9
755.5
49.1
6.5
905.1
609.6
775.6
53.9
6.9
923.0
622.2
790.0
52.0
6.6
81.3
69.9
85.2
79.8
80.8
76.7
85.8
80.5
89.7
82.9
94.1
85.6
100.5
89.8
214.6
231.0
-16.4
219.8
240.0
-20.2
225.7
243.2
-17.5
2.5
1111.2
1104.16
2.5
2.0
1/
Personal income-'
Wage and salary disbursements
Disposable income 1/
Personal saving 1/
1/50.2
Saving rate (per cent)'
1/
,/
Corporate profits before taxCorp. cash flow, net of div. (domestic)-
Federal government receipts and
expenditures (N.I.A. basis)
Receipts 1/
Expenditures
1/
Surplus or deficit (-)-
194.8
206.3
-11.5
205.5
224.3
-18.8
198.2
214.2
-16.0
84.3
79.2
202.2
223.0
-20.8
206.9
228.9
-22.0
-0.8
-0.4
1.3
-2.0
-2.6
1.6
-1.7
1.0
Total labor force (millions)
"
Armed forces
Civilian labor force "
Unemployment rate (per cent)
85.9
3.2
82.7
4.9
87.0
2.8
84.2
6.3
86.5
3.0
83.6
5.9
86.9
2.9
84.1
6.2
87.2
2.8
84.4
6.5
87.4
2.7
84.7
6.6
87.6
2.6
85.0
6.5
88.0
2.6
85.4
6.3
Nonfarm payroll employment (millions)
Manufacturing
70.7
19.4
71.0
18.7
70.6
18.7
70.8
18.7
71.1
18.7
71.4
18.8
71.8
18.9
72.3
19.0
Industrial production (1957-59=100)
Capacity utilization, manufacturing
(per cent)
168.2
167.7
165.4
167.2
168.0
170.0
172.5
175.5
76.6
72.8
73.0
73.0
72.6
72.7
73.1
73.6
1.43
1.97
1.81
1.95
2.05
2.08
2.10
2.10
7.12
8.42
8.39
8.40
8.40
8.50
8.60
8.75
High employment surplus or deficit (-)-/
Housing starts, private (millions A.R.)
Sales new domestic autos (millions,
A.R.)
NOTE:
Projection of related items such as employment and industrial production index are based on projection
Federal budget high employment surplus or deTicit {N.I.A. basis) are staff estimates
of deflated GNP.
and projections by method suggested by Okun and Teeters.
effects of total addit-onal depreciation allowable under Treasury's newly-approved "acrelerated
depreciation range" guidelhnes, which are effective as of the beginning of 1971.
1/ Reflects
II-
7
CONFIDENTIAL - FR
June 23, 1971
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1970
1971
Proj.
I
1972
1971
Projection ---------------------II
III
IV
I
II
------------------- Billions of dollars--------------------75.3
-0.8
76.0
61.1
62.0
-0.9
15.0
Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government
GNP in constant (1958) dollars
Final purchases
Private
-3.0
1.2
7.2
17.2
18.0
19.3
---------------
27.0
2.9
24.1
17.3
17.3
0.0
6.8
21.0
-3.1
24.1
16.0
16.0
0.0
8.1
12.4
14.4
14.6
5.8
3.6
4.2
4.7
6.9
5.6
7.5
5.6
5.1
13.1
13.4
14.4
7.8
6.7
7.5
Personal consumption expenditures
Durable goods
Nondurable goods
Services
6.8
-0.7
7.7
8.7
8.0
11.6
6.3
8.4
12.4
57.2
1.9
8.7
7.3
2.9
8.4
7.8
8.6
9.4
8.3
8.5
8.4
10.0
7.9
8.3
Gross private domestic investment
Residential construction
Business fixed investment
-2.9
-7.2
3.3
9.0
30.0
3.8
15.5
44.7
15.0
18.8
26.8
5.3
-3.2
14.7
1.9
11.4
13.1
1.9
6.8
0.1
-3.5
12.6
12.2
9.9
0.8
-3.2
17.0
16.6
3.8
-3.3
-6.5
6.5
9.5
14.0
16.0
11.0
28.9
12.6
7.11/
13.9
11.7
4.5
15.2
7.6
10.3
11.2
11.8
8.1
21.7
10.7
8.6
11.3
9.8
10.4
7.6
10.8
7.5
9.2
6.3
7.6
7.9
5.5
9.3
9.2
10.6
7.9
8.3
7.4
4.8
23.6
17.3
7.1
18.2
19.6
27.2
-2.9
7.8
5.5
8.7
13.6
8.2
8.1
16.4
9.3
10.6
14.9
3.7
9.7
15.6
10.7
5.3
0.6
-3.9
0.4
-3.6
2.5
1.1
1.1
0.0
1.7
0.0
1.7
2.1
2.2
2.1
2.8
2.1
4.2
30.4
0.6
2.1
20.3
0.0
4.7
6.4
4.8
7.2
7.0
7.7
-10.9
Federal government receipts and
expenditures (N.I.A. basis)
Receipts5/
Expenditures
Nonfarm payroll employment
Manufacturing
5/
Personal income
Wage and salary disbursements
Disposable income 5/
Industrial production
Housing starts, private
Sales new domestic autos
9.4
8.5
8.9
2.5
3.8
8.1
10.1
5.61'
5/
10.0
8.9
8.3
3.2
2.0
2.9
4.6
4.8
2.4
2.5
3.3
5.2
4.9
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weight index/
Corporate profits before tax
9.7
7.8
7.2
In Per Cent Per Year--------------------
Gross National Product
Final purchases
Private
Gov't. purchases of goods & services
Federal
Defense
Other
State & local
8.9
6.7
5.9
-2.7
-2.6
-15.9
-0.3
37.7
18.3
5.21/
6.6
8.1
216.4
4.8
3.6
3.9
3.7
5
5.11/
. 5 2/
4.4
4.5
1/ At compounded rates.
2/ Excluding effects of military pay increase, 4.5 per cent per year.
3/ Excluding effects of general Federal government pay increase,
4.3 per cent per year.
4/
Using expenditures in 1965-IV as weights.
5/
Reflects effects of total additional depreciation allowable under Treasury's newly-approved
"accelerated depreciation Tange" guidelines, which are effective as of the beginning of 1971.
II - 8
Industrial production.
The May increase in industrial
production was widespread, with the largest advances in autos and
steel.
However, if the slight rise in output of business equipment
is not just a one month "up tick," it could be the most significant
production change in May.
INDUSTRIAL PRODUCTION
1957-59=100, seasonally adjusted
1969
Total index
Per cent change
July 1969
April 1971
1971
July1/
March
April
May
174.6
165.5
166.2
167.3
to May 1971
-4.2
to May 1971
.7
164.4
166.2
167.1
168.3
2.4
.7
178.7
184.4
158.1
167.3
180.2
162.3
153.9
184.4
163.3
161.4
184.6
163.9
-9.7
.1
3.7
4.9
.1
.4
Business equipment
196.9
170.5
169.5
169.9
-13.7
.2
Defense equipment
169.9
112.2
108.1
108.5
-36.1
.4
Materials, total
Durable
Steel
176.5
167.0
145.3
168.0
151.4
138.3
169.3
152.8
141.9
170.3
153.8
144.0
-3.5
-7.9
- .9
.6
.7
1.5
186.4
185.2
186.3
187.2
Consumer goods
Autos
Home goods
Apparel & staples
Nondurable
1/
.4
.5
Pre-recession peak.
Industrial production is anticipated to have increased further
in June but not by as much as in May.
are set at the May rate.
June auto production schedules
Output of raw steel is being cut back more
than usual in June and steel mill finishing operations will probably be
at or below the May level.
Coal production has been reduced by strikes
and Texas "allowable" crude oil extraction was curtailed further in June.
II
- 9
Also,
there is
lack of expansion in output of appliances,
sets,
apparel,
and nonferrous metals.
television
But increases are expected in
production of consumer staples, furniture, textiles and some other
materials.
Retail sales.
to May,
Retail sales declined 0.8 per cent from April
according to the advance report,
stantial increase.
following two months of sub-
Durable goods sales were down 2.9 per cent, with
the automotive group off 4.0 per cent and the furniture and appliance
group declining 2.9 per cent.
virtually unchanged from April,
Nondurable goods sales as a whole were
as increases in
food and apparel off-
set small declines in general merchandise and various smaller categories.
Compared with a year
earlier, May sales were up 6.0 per cent.
Sales in March and April were revised upward by more complete
sample counts and now appear as the strongest months, compared with a
year earlier, since early 1969.
The largest increases from a year
earlier were shown by the automotive and general merchandise groups.
II
- 10
RETAIL SALES
Seasonally Adjusted
Percentage change 1971 from:
Year earlier
May
March
April
Total
Durable
Auto
Furniture & appliance
Nondurable
Food
General merchandise
Total, less auto and
nonconsumption items
GAAF
Total real*
*
Previous month
April
May
March
1.0
-0.8
4.0
1.5
-2.9
5.1
3.6
2.1
-2.6
-4.0
-2.9
6.3
6.8
6.0
2.1
11.5
10.6
7.7
15.3
4.7
15.2 13.0
- .6 -2.2
6.9
5.1
5.3
1.2
.9
4.8
4.9
5.8
.9
1.1
1.2
13.5
9.0
10.0
1.5
1.2
- .5
6.4
4.6
4.6
1.2
.7
11.1
5.3
6.4
1.8
-. 2
4.4
3.1
2.2
1.5
.6
Actual sales deflated by commodity components of
Index, seasonally adjusted.
Unit auto sales.
first
.1
.0
- .6
-1.2
the Consumer Price
Sales of new domestic-type autos in
the
10 days of June were at an annual rate of 7.4 million units,
12 per cent below the 8.4 million rate prevailing in the first
months of the year.
The decline was concentrated at
five
GM dealers and
reflected the ending of a sales incentive contest in May.
Inventories.
Book value of manufacturing and trade inventories
rose at an $8.6 billion annual rate in April,
data--only a little
billion.
little
according to preliminary
less than the upward-revised March rate of $10.3
Sales also rose in April, and inventory-sales ratios were
changed from the reduced March levels.
II -
11
CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
Seasonally adjusted annual rates, billions of dollars
1970
Q IV
1971
QI
(rev.)
1971
March
(rev.)
April
(prel.)
Manufacturing and trade, total
Autos and steel
Excluding autos and steel
4.4
5.9
-4.1
8.5
6.5
- .6
10.3
8.5
1.8
8.6
3.5
5.1
Wholesale and retail trade, total
Autos and steel
Excluding autos and steel
.6
-5.7
6.3
6.7
6.0
.8
11.6
7.8
3.8
7.0
2.9
4.2
3.8
1.6
2.3
-. 8
.6
-1.4
-1.2
.7
1.5
.6
Manufacturing, total
Autos and steel
Excluding autos and steel
-2.0
.9
The industrial composition of inventory accumulation has
changed markedly in recent months.
In the first quarter, the only
upward impetus to inventories was in the auto-and steel-related
sectors; in April, however, more than half of the increase occurred
outside of autos and steel.
INVENTORY-SALES RATIOS
1970
1971
March
(rev.)
April
( p rel.)
June
December
Manufacturing and trade, total
Autos and steel
Excluding autos and steel
1.56
1.50
1.56
1.60
1.61
1.60
1.53
1.54
1.44
1.45
1.55
1.55
Wholesale and retail trade, total
Autos and steel
Excluding autos and steel
1.36
1.66
1.40
1.76
1.36
1.36
1.30
1.34
1.61
1.31
1.61
1.30
Manufacturing, total
Autos and steel
Excluding autos and steel
1.73
1.34
1.80
1.78
1.47
1.83
1.70
1.27
1.77
1.70
1.28
1.78
II - 12
In May, dealers'
stocks of new domestic-make cars rose.
Unit sales of these cars also increased and the dealers'
ratio for new domestic autos declined slightly.
stock-sales
However, this ratio
was above year-earlier levels in both April and May, and at 58 days'
supply, seasonally adjusted, was approaching the level of autumn 1969.
When surveyed in May, manufacturers anticipated adding to
their inventories at a $2.4 billion annual rate during the current
quarter, somewhat higher than the $1.5 billion rate actually reported
by manufacturers in preliminary April data.
Manufacturers expected to
add to stocks at a $3.6 billion rate in the third quarter, but such
"first anticipations" are subject to considerable error.
There was a
decline in the reported amount of inventory excess to $2.13 billion,
the lowest figure since June 1969.
Sales were projected to increase
2 per cent in the second quarter and 3 per cent in the third.
Manufacturers'
orders and shipments.
New orders for durable
goods rose 1.9 per cent in May, according to the advance report, after
declining 3.6 per cent in April.
quarter average.
The May level remains below the first
Shipments also rose in May and the unfilled order
backlog was down 1.3 per cent, the third straight month of decline
for this series.
II - 13
MANUFACTURERS' NEW ORDERS FOR DURABLE GOODS
Seasonally adjusted monthly averages
1970
Q IV
1971
Q I
April
(rev.)
May
(advance)
Change,
May from
April
----Billions of dollars----- -Per cent29.4
24.0
31.7
4.4
30.6
23.9
31.2
24.5
1.9
2.5
Primary metals
Motor vehicles and parts
Household durable goods
Defense products
4.6
3.2
2.1
2.1
5.2
4.6
2.2
2.0
5.0
4.4
2.3
1.5
5.0
4.6
2.3
1.7
.3
3.6
-2.7
10.3
Capital equipment
All other durable goods
8.7
8.8
8.8
8.8
8.4
9.0
8.5
9.1
2.2
1.5
Durable goods, total
Excluding autos and steel
NOTE:
Detail may not add to totals because of rounding.
changes calculated from unrounded data.
Per cent
Orders rose for defense products and capital equipment, but
both remain below the first quarter rate; also, backlogs fell for
both groups.
Iron and steel orders fell
further in May,
but this drop
was offset by increases for other primary metals manufacturers.
"All
other" durable goods,which include construction materials and miscellaneous
producer and consumer goods and materials, rose in May and were above
the first quarter average.
Cyclical indicators.
The preliminary Census composite
index of leading indicators rose 0.6 per cent in May,
straight month of increase.
the seventh
The coincident composite rose for the
sixth month in a row, and the lagging composite for the third month
in a row.
II
- 14
COMPOSITE CYCLICAL INDICATORS
(1967 = 100)
12 Leading,
trend adjusted
5 Coincident
6 Lagging
1970:
October
113.8
118.8
130.8
November
December
114.1
116.3
117.9
119.1
128.9
126.7 (r)
1971:
January
118.5
121.1
125.5 (r)
February
119.9
121.8
14.1 (r)
March
122.6 (r)
122.5 (r)
125.1 (r)
April
May
122.9 (r)
124.2 (p)
125.0 (Est.)(H) 123.5 (p)(H)
(H)
Current high value.
in September 1970.
NOTE:
125.5 (r)
126.0 (p)
The lagging composite reached its high
April leading composite still
formation not included.
preliminary - net business
The lagging composites for December through April were
revised downward as much as 4.4 per cent on account of the inclusion
of business loan rates and of actual instead of anticipated plant
and equipment spending for the first quarter.
The National Bureau of Economic Research, in a paper by
Solomon Fabricant published last month, has expressed the judgment
that in
1969 and 1970 the U.S. economy experienced a "
'classical'
contraction, that is, a contraction of the same general type as those
listed in
the National Bureau's business-cycle chronology."
1969 is chosen as the "tentative" peak date.
Fabricant judges that
the contraction continued to November 1970 but that is
tell whether it troughed then or not.
November
too early to
II
- 15
Based on relationships from previous postwar cycles,
the
leading indicator composite had "predicted" that the recession would
be at least as severe as the 1960-61 downturn, but as measured by the
coincident composite, it was less severe.
Since November, the leading
composite has increased slightly more than in the six months following
February 1961 but less than in
The recovery through May in
the other comparable recovery periods.
the coincident composite, however,
was
weaker than six-month rates of recovery from any of the four previous
troughs, although it
included the recovery from the GM strike.
A coincidence of strike and cycle troughs would not be
unprecedented:
steel strike.
the Bureau's October 1949 trough coincided with a
In that case it has been argued by some that the real
trough came earlier.
In the recent case, it has been similarly argued
by some that the recovery began in mid-1970 but was interrupted by the
strike, but a case could also be made that the trough in the rest of
the economy came later, say in February 1971.
The recovery in the
coincident composite is equally unimpressive measured from that date,
though the number of months since then for which we have data is
insufficient for making a good comparison.
Residential construction and real estate.
Seasonally adjusted
private housing starts turned upward again in May to an annual rate of
1,931,000.
Except for March, when the multifamily component of starts
reached a record rate,
this year.
the over-all pace in May was the highest so far
Single-family starts also edged higher to maintain the
improved relative share--57 per cent--of total starts regained in April.
II -
16
With commitments and builder permits both at new peaks this
spring--permits were up 14 per cent further in May--some further
expansion in starts is indicated for June, possibly to or above the
2 million unit rate.
Such a rate would carry the average for the
second quarter as a whole to an annual rate of 1.95 million units, or
more than 50 per cent above the cyclical low in the first quarter of
last year.
Assuming mobile home shipments hold near the record
478,000 annual rate reported for April, the combined rate of new shelterunits for the second quarter could exceed the previous historic high
reached in the first quarter of this year by as much as 200,000 units.
PRIVATE HOUSING STARTS AND PERMITS
(Seasonally adjusted annual rates, in thousands of units)
Total 1/
1970 - Annual
Starts
Per Cent
Single-family
Per Cent
FHA-insured 2/
(FHA Series)
Permits
1,434
57
29
1,324
1,252
1,286
1,512
1,777
54
58
56
58
23
28
28
35
1,0S5
1,257
1,358
1,593
1,813
55
24
1,608
1,959
1,899
1,931
53
57
57
20
22
n.a.
1,627
1,36
1,870
1970
IQ
IIQ
IIIQ
IVQ
1971
IQ
1971
March (r)
April (r)
May (p)
1/ Apart from starts, mobile home shipments for domestic use in
April--the latest month for which data are available--were at a
record seasonally adjusted annual rate of 478,000, 14 per cent
higher than in March and 7 per cent above a year earlier.
2/ Based on unadjusted totals for all periods. FHA-insured starts
include both subsidized and nonsubsidized units.
II
- 17
Demands for both used and new homes were exceptionally strong
in April, the latest month for which data are available.
In the case
of single-family homes offered by speculative builders--who in recent
years have accounted for up to six-tenths of total single-family starts-the annual rate of sales was second only to the record 662,000 reached
in March and nearly half again as high as a year earlier.
While the
number of homes available for sale by such builders rose somewhat, it
was only slightly higher than in 1970.
Reflecting in part some upgrading
in demands, moreover, the composition of such stocks was more closely
in line with market requirements, as indicated by the narrowing spread
between the median prices of homes sold and homes for sale shown in
the table.
Altogether, the median price of homes sold in April was
back up nearly to the median price in 1969.
NEW SINGLE FAMILY HOMES SOLD AND FOR SALE
Homes sold
/
Homes
for sale-
(Thousands of units)
Median price of:
Homes sold Homes for sale
(Thousands of dollars)
1969 - Annual
452
228
25.6
27.0
1970
467
226
23.4
26.2
1970
IQ
408
214
23.9
27.2
IIQ
457
218
24.4
27.0
IIIQ
525
216
23.0
27.1
IVQ
585
226
22.6
26.2
1971
IQ
636
218
24.3
26.1
1971
February
March
April
604
662
648
211
218
228
24.7
24.4
25.3
26.0
26.1
26.5
1/ SAAR.
2/
End of period.
II
Labor market.
recent weeks.
- 18
The labor market has continued slack in
Initial claims for unemployment benefits have been
rising in recent weeks and total insured unemployment has continued
to edge up from its post-auto strike low in January.
STATE INSURED UNEMPLOYMENT
(Seasonally adjusted weekly averages, in thousands)
Initial
Insured
Claims
Unemployment
May
314
1,885
November
December
334
292
2,388
2,158
1971:
January
February
March
283
284
297
1,993
2,008
2,060
April
283
2,120
May
304
2,260
1970:
The outlook is for some added pressure on unemployment from
the supply side.
About 4 million persons from 16 to 24 years of age
are expected to be added to the civilian labor force between April
and July this year--about 150,000 more than last year.
The increase
over the summer in the 20-24 year group is expected to be double that
of years as recent as 1966.
With demands for labor still slack, a
further rise in unemployment among young job seekers seems likely this
summer and fall.
II
- 19
CIVILIAN LABOR FORCE
(Not seasonally adjusted, in thousands)
Change from April to July
1971*
1970
1966
Age
16-24
16-19
20-24
450
3,950
2,921
1,029
Projected on the basis of poppulation
changes.
*
Personal income.
in May.
3,786
2,819
967
3,395
2,945
Total personal income rose by $6 billion
The annual rate of increase of about 8.5 per cent was close
Total wages and salaries rose by
to the average so far this year.
A
over $4 billion compared to a $2.7 billion increase in April.
pick-up in nonfarm employment--primarily in retail trade and manufacturing-and an increase in the manufacturing workweek mainly accounted for the
larger May increase, although average employee earnings also continued
to rise rapidly.
Transfer payments were up $1 billion and small gains
occurred in interest, dividends and rental income.
PERSONAL INCOME
(Billions of dollars, SAAR)
1970
May
Total
Wages and salaries
799.7
Government
540.5
116.9
Private
Manufacturing
Nonmanufacturing
423.6
159.2
264.4
Transfer payments
76.6
1971
Per cent change from:
April
May
841.4
566.9
120.9
446.0
160.7
285.3
847.4
571.2
121.3
449.9
162.1
287.8
8.6
9.1
4.0
10.5
10.5
10.5
88.8
89.8
14.9
April 1971
May 1970
6.0
5.7
3.8
6.2
1.8
8.9
17.4
II - 20
Wages and collective bargaining.
large.
Wage increases continue
Hourly earnings of production workers in the private nonfarm
sector were up 6.3 per cent over the year ending in May 1971.
This
is about the same year-over-year increase as reported in earlier months
of 1971,
and for 1970 as a whole.
Collective bargaining agreements
concluded in late 1970 have resulted in accelerated earnings increases
in the manufacturing and transportation and public utilities industries.
In manufacturing, the largest increases have occurred in the automobile
industry.
In transportation, increases have been large in both the
railroads and trucking.
AVERAGE HOURLY EARNINGS OF PRODUCTION
AND NONSUPERVISORY WORKERS
(Per cent change from a year earlier)
1969
Total private
Manufacturing
Mining
1970
1971
01
May
6.7
6.3
6.4
6.3
6.0
7.5
5.3
6.7
6.5
5.9
6.3
6.1
9.4
Contract construction
8.4
9.2
8.9
Transportation & public utilities
6.1
6.1
7.7
7.4
Trade
6.7
5.9
5.9
5.9
Finance
6.2
5.1
6.1
7.9
Services
8.2
8.0
8.2
7.5
An affirmative strike vote has been taken among the telephone
industry workers (the strike deadline is mid-July).
Negotiations in
the steel industry are under way, but have not yet started on national
issues.
Following the lead of recent aluminum and can settlements,
the
telephone and steel contracts are currently eXpected to provide first
II
- 21
year wage increases of at least 10 per cent, with second and third year
boosts of 3 to 4 per cent to be supplemented by an open-ended cost-ofliving adjustment clause.
Contracts for coal miners and East coast
longshoremen will expire September 30, 1971.
Consumer prices.
Consumer prices rose at a seasonally
adjusted annual rate of 6.9 per cent in May, the sharpest increase
in over a year.
Acceleration of the rise reflected a rebound in
service costs and a sharp increase in non-food commodity prices.
The
increase in food prices, seasonally adjusted, was modest, especially
when compared to experience earlier this year.
The decline in mortgage
costs was much smaller than over the preceding few months, and the
effect on the all-items index was much less than in April or in the
first quarter, as may be observed from the table (which shows figures
that are not seasonally adjusted).
EFFECT OF MORTGAGE COSTS ON CONSUMER PRICES
(Percentage changes at annual rates, not seasonally adjusted)
June 1970
to
Dec. 1970
Dec. 1970
to
March 1971
March 1971
to
April 1971
April 1971
to
May 1971
All items, CPI
All items, less mortgage
costs 1/
4.9
2.4
4.1
6.2
4.8
3.8
6.2
6.2
Services
Services less home
finance 1/ 2/
7.0
3.2
1.9
6.8
6.9
8.5
6.0
5.9
1/
2/
Confidential
Excludes mortgage interest costs, property taxes and homeowners'
insurance.
II - 22
The rise in apparel prices accelerated in April, with a
particularly large increase for women and girls clothing, which is
reported to be selling well this season.
Gasoline prices also rose
after declining for three months, and were below those of a year
earlier.
A major influence on the durable goods group in May was
the third consecutive large increase in used car prices, a series
that introduces a great deal of distortion in monthly price movements.
Also, prices of new and used homes rose substantially after changing
little in the period January through April.
New cars and household
durables rose at relatively moderate rates.
CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
June 1970
Dec. 1970
March 1971
to
Dec. 1970
to
March 1971
to
April 1971
April 1971
to
May 1971
4.9
.9
5.2
2.8
6.0
1.0
3.4
10.7
2.1
6.9
2.1
8.6
1.0
All items
Food
Commodities less food
Apparel
Gasoline 1/
New cars
Used cars 1/
Services 1/
1/ Not seasonally adjusts.
4.0
-5.8
4.1
-21.4
9.4
3.5
11.6
1.7
4.7
-9.5
.0
39.5
4.3
38.2
7.0
3.2
4.3
1.9
6.8
II - 23
Food prices rose much less in May than in April or in the
first quarter; meat prices edged off as declines for beef and pork
were mostly offset by increases for poultry and fish.
and vegetable prices declined more than seasonally.
Fresh fruit
Only moderate
increases in food prices are expected in the next few months.
Charges for services increased at an annual rate of almost
7 per cent in May,
far above the rates earlier this year.
The sharp
rise in postal rates accounted for about one-fourth of the increase
in
the service category.
increases in
Home finance costs rose substantially as
property taxes far outweighted the more moderate drop
in mortgage rates.
But the rise in other service costs was smaller
on average than in preceding months.
II-C-1
6/22/71
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE
EMPLOYMENT ETAB
.
BASIS
MILLIONS OF PERSONS
,. -
YNO
NAG RiCULTURAL
MAY 708
MANUFACTURING
MAY 187
I
41
II I
I iI 1i
1 I I I LL
WORK WEEK-MFG.
-42
MAY 399
1969
INDUSTRIAL PRODUCTION - I
1957-59=100
1200
TOTAL
MAY 1673
CONSUMER GOODS
MAY 1683
I
II
1969
llli
INDUSTRIAL PRODUCTION - 11
ji
l I i
ll ll
1971
1957-
II
HOURS
1971
II-C-2
ECONOMIC DEVELOPMENTS - UNITED STATES
6/22/71
SEASONALLY ADJUSTED, RATIO SCALE
INCOME
BIL
PRICES AND COSTS
1967=100
IANNUAL RATE
PERSONAL
MAY 8474
2120
DISPOSABLE
CC 7151
CONSUMER *
-110
pF
MRlKHMETICSCALE
1
<OST
MAY 11208
INDUSTRIAL WHOLESALE*
MYI
SAVING RATE
969
1969
MAY 1134
I I
I
SII I I
*N S A
1971
I I
I
I
I
I I
I I,
IA
1971
1969
BUSINESS INVESTMENT
eBI
100
PLANT AND EQUIPMENT OUTLAYS
ANNUAL RATE
TOTAL
MAY 323
-
-
Ga 8274
80
60
MFG. NEW ORDERS
10
GAAF
MAY 89
,
CAPITAL EUIPMINT
MAY---
NVENTORY RATIOS
I
I I II
II I
II
III 1
6
SCALE, PERCENT
ARITHMETIC
MANUFACTURERS'
DURABLE GOODS TO UNFILLEDORDERS
APR 83
1.9
III - 1
THE ECONOMIC PICTURE IN DETAIL
Domestic Financial Situation
Flow of Funds, Second Quarter.
Based on preliminary estimates
and partial projections, total credit flows appear to have surged
upward in the second quarter to a $140 billion seasonally adjusted
annual rate.
The $36 billion increase from the first quarter was
virtually all a resumption of Treasury borrowing, however, and reflected
mainly the Government's efforts to restore its cash balances after the
severe runoffs of cash in the first quarter.
Other borrowing continued
at the high rates of the first quarter relative to investment outlays
and other financing requirements.
Total credit flows over the half-year
were 11.8 per cent of GNP, higher than the peak rate for any full year
that was reached in 1968.
Given these estimated flows, total debt
outstanding was growing during the first half of 1971 at a 7.9 per cent
annual rate, well below the 10 per cent rate of increase for GNP over
the same period.
III - 2
TABLE 1.
CREDIT MARKET FUNDS RAISED BY NONFINANCIAL SECTORSa/
(Net flows in billions of dollars at seasonally adjusted annual rates)
1969
1970
H2
H1
1971
QI
QIIp
II/71
less 1/71
90.3
92.6
101.4
104.5
140.5
+36.0
-3.6
9.5
16.1
.7
35.0
+34.3
Private debt securities
and mortgages
49.1
50.2
66.1
83.6
80.7
-2.9
State and local govt.-Short-term
Long-term
3.1
5.0
3.1
6.5
4.6
9.5
7.-4
18.7
3.7
13.2
-3.7
-5.5
Corporate & Foreign
bonds c/
13.1
18.7
23.5
28.1
27.3
6.
Residential mortgages
20.5
15.9
20.2
20.3
27.8
7.
Other mortgages
7.4
6.0
8.3
9.1
8.6
-. 5
8.
Bank loans-
15.5
8.3
-2.8
1.9
1.8
-. 1
9.
9.
e/
Other
Other loans-
24.5
18.6
14.3
12.1
14.2
+2.1
4.8
6.0
7.6
6.1
8.3
+2.2
.4
1.5
33.7
-19.4
11.5
+30.9
1.
Total funds raised
2.
2.
U.S.
U.S.
3.
4.
5.
Govern
Government-b/
10.
Corporate equities
11.
Memo:
Change in U.S. Govt. cash
a/
b/
c/
d/
e/
-. 6
+7.5
Nonfinancial sectors comprise households, nonfinancial business, state and
local governments, foreign, and U.S. Government.
Excludes sponsored credit agencies.
Excludes net issues by financial corporations.
Excludes commercial paper and acceptances
Mainly business and farm loans.
held by banks; excludes mortgage loans and consumer credit security loans.
Consumer credit, commercial paper issued by nonfinancial companies,
acceptances, commercial credit from finance companies, and U.S. Government loans.
III - 3
Second-quarter private borrowing has been mainly long term,
in the pattern that was set late last year.
Municipal borrowing--both
short term and long term--appears to be tapering off, after allowance
for seasonals, from the very high rates that began in December.
While
public construction is higher this year than last, the first-quarter
rate of state and local government net issues was well beyond current
financing requirements, and some reduction in offerings was to be expected.
On an NIA basis, State and local government budgets are estimated to be in balance this year even with the higher construction outlays.
Including allowances for employee retirement funding and other
financial needs, however, these governments appear to have a credit
requirement for the year of about $12 billion.
With borrowing during
the first six months at a $21 billion rate, some governments have clearly
made sizable additions to liquidity holdings.
Corporate business net borrowing in the second quarter has
been almost entirely in bonds, mortgages, and equity offerings.
This
is a continuation of the first-quarter structure of flows, and, with
short-term debt almost static in amount outstanding, the security offerings have been sufficient to cover all investment requirements and to
provide for a more than ample rate of growth in liquid assets.
Liquidity
ratios to short-term debt have been restored to roughly 1966 year-end
levels of about 30 per cent, well up from the 26 per cent trough at the
end of 1969.
With the improvement in these ratios, long-term financing
is losing the urgency it has had for business recently, and the volume
of offerings will probably become more sensitive to movements in market
rates.
II - 4
For residential mortgages, the principal sources of increased
flows in the second quarter were savings and loan associations and a
resumption of net buying by FNMA.
First-quarter flows were low relative
to estimated construction outlays, and the sharp rise in the second
quarter is in part a compensation for that.
For the half-year, mortgage
flows were somewhat high relative to construction, suggesting that
existing house financing had increased from last year.
RESIDENTIAL FINANCE
(Billions of dollars, seasonally adjusted annual rates)
1970
Residential construction
Residential mortgages,
net change
1971-H1
Change
29.7
37.0
+7.7
18.1
24.3
+6.2
On the supply side of credit markets, private investors were
evidently still liquidating Governments on a net basis in the second
quarter, although by much smaller amounts than in the first quarter.
Even with the increase in Treasury issues, Federal Reserve and foreign
supply of funds appear to have provided most of the net Treasury requirement.
Sponsored-agency borrowing was dominated in both the first
and second quarter by retirements of home loan bank debt that had been
financing credit to thrift institutions.
III - 5
(Net flows in
TABLE 2. SECURITY MARKETS
billions of dollars at seasonally adjusted annual rates)
1971
1970
19
QIIp
HI
H2
91
5.6
19.5
22.7
-3.6
32.9
-3.5
9.1
9.6
9.9
16.1
6.6
.8
-4.4
35.1
-2.2
5.6
19.5
3.2
8.1
3.7
5.3
-. 8
22.7
6.7
10.1
14.3
5.4
-13.8
-3.6
32.9
15.2
26.4
4.7
7.3
-57.2
7.0
20.2
15.0
.7
-10.1
9.5
14.1
26.0
16.9
13.7
.4
23.9
2.1
18.7
-1.8
20.6
26.0
30.7
28.6
11.0
1.3
8.0
.3
12.9
1.5
8.4
4.0
11.7
7.5
9.8
1.7
11.3
9.0
9.6
1.3
U.S. Government and agency securities
1.
2.
3.
Total net issues
Treasury & budget
agencies a/
Sponsored credit agencies
4.
5.
6.
7.
8.
9.
Net purchases
Federal Reserve
Foreign
Commercial banks
Nonbank finance
Pvt. domestic nonfinancial
4.2
-1.8
-9.5
-2.3
15.0
State and local 2overnment securities
10.
11.
12.
Total net issues
Net purchases by:
Commercial banks
Others
8.1
.4
7.7
Corporate bonds
13.
14.
15.
16.
17.
a/
b/
p/
Total net issues-/
14.8
Net purchases by:
Households & personal trusts 5.3
.3
Mutual savings banks
Insurance & pension funds
5.9
3.3
Others
Excludes the small amount of mortgage liabilities that are in U.S.
Government borrowing in Table 1, line 2.
Includes issues by banks and finance companies in addition to amounts
in Table 1, line 4.
Preliminary. Second quarter estimates are based on partial data and
are very preliminary.
III - 6
The municipal and corporate bond markets apparently had about
the same structure of supply as in the first quarter.
The second-quarter
decrease in municipal borrowing was matched roughly by a drop in
commercial bank buying, but banks continued to be the dominant source of
funds to this market.
In corporate bond markets, mutual savings banks
have continued to buy at their high first-quarter rates, providing a
major support to this market.
Corporate bonds have been a rising component
of savings bank portfolios since 1967, growing from 5 per cent of total
assets in 1966 to about 14 per cent currently.
About half of the rise
has been offset by a drop in Government securities as a per cent of
assets and the other half by a decrease in the mortgage component.
This
shift to bonds is related to the favorable yield on bonds relative to
mortgages and can be expected to continue unless mortgage yield spreads
rise again.
The household sector continued to absorb bonds at the very
high rates that began in 1970.
In the total structure of credit supply (table 3), the rise
in Treasury borrowing from first to second quarter is matched mainly by
the halt of security liquidation by private domestic nonfinancial investors (line 10).
For these investors, the first-quarter liquidation
had been offset by an enormous inflow of deposit money to institutions
(line 15), and in the second quarter the rate of these deposit flows
receded $40 billion, which was again the principal offset to security
market developments.
The second quarter drop in private domestic deposit
flow--to a rate that was still as high as in the summer of 1970--was
at both banks and savings institutions, but it was not reflected in
the lending activities of these institutions.
At banks, the first-
III - 7
quarter inflow had been countered to some extent by reduction of Eurodollar borrowings (in line 16) and by the drop in Treasury balances (line
17), and in the second quarter the changes in these other sources of funds
fully offset the change in private deposit flow.
At savings institutions,
the decreased deposit inflow in the second quarter was more than matched
by reductions in liquidity and did not impede a 30 per cent increase in
net mortgage lending at savings and loan associations.
III - 8
STRUCTURE OF CREDIT SUPPLY
TABLE 3.
(Net flows in billions of dollars at seasonally adjusted annual rates)
1.
1971
1970
1969
H1
H2
QI
90.3
92.6
101.4
104.5
QIp
Total credit-market funds raised
by nonfinancial sectors
Credit-market borrowing by
finance
Total funds raised and Supplied
in credit markets
(1+2=4+5+6+7+10)
31.1
23.9
1.3
-6.7
-9.6
131.4
116.5
102.7
97.7
130.9
4.
5.
6.
Funds supplied in credit
markets by:
Federal Reserve
Foreign
U.S. Govt. & sponsored agencies
4.2
1.3
11.5
3.3
9.5
14.1
6.6
12.3
11.1
15.5
27.1
1.7
7.0
20.3
-5.3
7.
Total private finance
66.5
69.6
95.6
17.5
49.0
18.8
40.2
40.8
55.4
37.9
26.6
-55.5
-57.2
11.1
-9.4
-10.0
103.7
135.7
-12.6
-19.4
105.9
96.0
-1.6
11.5
2.
3.
8.
9.
10.
Commercial banks
Pvt. nonbank finance
Pvt. domestic nonfinancial
sectors
15.0
7.-6
15.3
11.1
16.3
-17.2
-13.8
12.4
2.8
Deposit claims on financial
institutions a/
Pvt. domestic nonfin.
Foreign a/
U.S. Govt.
13.4
4.7
8.3
.4
32.8
34.0
-2.7
1.5
77.9
88.3
-14.1
3.7
Commercial-bank credit as
per cent of total
(line 9/line 1)
19.3%
20.3%
11.
U.S. Govt. securities
12.
13.
Corporate bonds
Other credit
14.
15.
16.
17.
18.
a/
p/
-.8
39.6%
108.8
45.5
,63.3
140.5
109.6
44.8
64.8
-1.2
10.8
-2.0
43.5%
Includes Eurodollar borrowings by banks.
Preliminary second quarter estimates are based on partial data and
are very preliminary.
31.9%
III - 9
Bank credit.
Large banks continued to acquire securities in
significant volume in the early weeks of June but their loan expansion
moderated; in May, loans had accounted for a major share of the growth
in total credit at large banks (as well as at all commercial banks).
As
in April and May, almost all of the securities acquired were tax-exempt
obligations and, with interest rates apparently expected to rise further,
banks continued to emphasize short-term maturities.
Business loan growth had accounted for a major share of the
increase in total loans in May but the partial data for weekly reporting
banks suggest that business loan expansion at all banks in June will be
significantly below the strong May pace.
Such loans declined contra-
seasonally in the first two weeks of the month, as shown in the first
line of the table.
However, business borrowing did pick up over the mid-
month tax date at large New York and Chicago banks (the only institutions
for which that week's data are available at this writing) and about
equalled the average rate of the corresponding week in other recent years.
Even with that, however, an unusually rapid growth in such loans would
be required over the balance of June to produce a more than modest
seasonally adjusted increase in business loans for the month.
III -10
CHANGES IN BUSINESS LOANS AT WEEKLY REPORTING BANKS 1/
(Millions of dollars, not seasonally adjusted)
All weekly reporters
Average
1968-70
1971
2/
Two weeks: May 26-June 9
One week: June 9-June 16- 2/
Three weeks: May 26-June 161/
2/
654
1,297
1,951
-61
n.a.
n.a.
Weekly reporters in
New York and Chicago
Average
1968-70
1971
289
629
918
-77
687
610
Adjusted for loans reported sold to affiliates.
Dates for 1971; comparable dates used for other years.
Tax borrowing at mid-month appears to have been relatively
larger than over the March and April tax dates, even though corporate
tax liabilities were at their lowest level for June since 1965.1/ The
satisfaction of a larger proportion of tax borrowing at banks in June
no doubt reflected the narrowing of the costs between bank credit and
other short-term sources of finance, most of which has occurred since
early May.
Upward pressure on short-term market rates encouraged two
banks outside New York to raise their prime rate in early June.
But,
with business loan demands remaining weak to moderate at best--and
perhaps in view of the political difficulties envisioned--the higher prime
rate has not yet spread at this writing.
Note:
Final data for bank credit developments in May have
become available since the last Greenbook.
Also, data for earlier
periods have been revised to reflect adjustments to the December 31, 1970
Call Report benchmark.
These data, presented in the table below, are
quite similar to those presented earlier and need no comment here.
1/
Maturing tax bills were also smaller than in previous periods, but in
recent months corporations have not relied heavily on such paper for
tax payments.
III - 11
COMMERCIAL BANK CREDIT ADJUSTED TO INCLUDE
OUTSTANDING AMOUNTS OF LOANS SOLD TO AFFILIATES
(seasonally adjusted percentage changes, at annual rates)
1971
1970
2/
Total loans & investments -
U.S. Government securities
Other securities
Total loans
1/
2/
3/
4/
QIV
8.5Al
QI
A'
12.2
April
-0.3 A'
May
11.7
6.2
36.5
19.8
27.9
-23.5
20.9
-16.7
1.2
6.3
-2.4
12.9
18.2
1.0
--4.9
Business loans /
Last Wednesday of month series.
Includes outstanding amounts of loans sold outright by banks to
their own holding companies, affiliates, subsidiaries, and foreign
branches.
Includes outstanding amounts of business loans, sold outright by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.
Data revised to reflect adjustments to December 31, 1970 Call Report
benchmarks.
Monetary aggregates and bank sources of funds.
The table
below summarizes recent rates of growth in the monetary aggregates through
May.
Available data for the first half of June indicate that M1 remained
at near its end of May level.
Since M1 grew rapidly over May, the
maintenance of the end-of-month level suggests that, on a daily average
basis, growth of M1
May rate.
in June will be substantial, but below the record
The rate of advance of M2 also appears to have moderated in
early June, primarily reflecting the slowing of growth in M1.
III - 12
MONETARY AGGREGATES
(Seasonally adjusted, annual rates of change, in per cent)
1970
QIV
QI
M1 (currency plus private
demand deposits)
3.4
8.9
11.6
9.3
16.3
M2 (M1 plus commercial bank
time and savings deposits
other than large CD's)
9,2
17.8
18.9
12.1
14.7
M3 (M2 plus savings deposits
at mutual savings banks
and S & L's)
9.7
19.0
19.8
16.1
15.7
4.
Adjusted bank credit proxy
8.3
10.9
6.9
5.3
7.5
5.
Commercial bank time and
savings deposits
21.8
27.3
25.9
10.7
14.5
1.
2.
3.
6.
1971
March April
May
a.
large CD's
79.4
27.9
19.2
-21.3
26.6
b.
other time and savings
15.4
27.2
27.0
14.8
13.0
11.5
23.3
24.9
21.8
13.4
Savings deposits at mutual
savings banks and S & L's
Inflows of time and savings deposits other than large CD's
(mainly consumer-type deposits) remained relatively rapid in
early June.
But with the higher level of competitive market rates of interest, at
least two banks on the west coast raised their offering rates on longerterm consumer-type deposits.
Offering rates on large CD's were also in-
creased in early June in an effort to keep pace with the advance in rates
on competing money market instruments.
However, with loan demands modest,
the dollar volume of CD's outstanding remained about unchanged on average
in the first half of June as a build-up over the earlier part of the month
was offset by more than seasonal tax date maturities.
III - 13
Nondeposit sources of funds, for the first time in several
months, increased somewhat in the early weeks of June.
Nearly all of
the increase was in borrowings from U.S. foreign branches.
It is not
clear why such borrowings should rise, given the spread of Eurodollar
rates over domestic interest rates; the drop in the Eurodollar call
loan rate below the Federal funds rate occurred after most of the steppedup borrowing by U.S. banks.
Nonbank depositary intermediaries.
Data thus far available
for June do not make it completely clear how much of a moderation in
deposit inflows may be accompanying short-term market yields that are
rising but are still generally below deposit rate ceilings.
Deposit
growth in May at nonbank thrift institutions had dropped from the
advanced rate of the first four months of this year.
But, according to
sample data, during the first half of June nonbank thrift institutions
continued to receive quite large deposit inflows.
In addition, deposit
patterns at New York City savings banks have not yet shown any
noticeable response to the recent New York City 14-month note, priced
to yield about 6 per cent before the triple tax exemption--Federal, State,
and local--available to residents.
III - 14
DEPOSIT GROWTH AT NONBANK
THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual
Savings Banks
1970 - QI
QII
QIII
QIV
1971 - QI
Savings and Loan
Associations
Both
2.7
2.3
2.5
6.4
6.9
10.5
7.2
10.6
12.1
7.0
9.3
11.6
17.7
26.0
23.3
March*
21.2
26.7
24.9
April*
19.0
23.8
22.2
May* p/
12.4
15.0
14.1
*
Monthly patterns may not be significant because of difficulties
with seasonal adjustment.
p/ preliminary
While the forthcoming reinvestment period could provide some
test of the ability of thrift institutions to hold and attract deposits,
the traditional quarterly dividend-crediting periods are becoming increasingly less useful in providing insight into the pattern of savings
flows.
As the following table illustrates, savings and loan associations
have locked up an increasing percentage of their deposit liabilities in
accounts with a minimum term over one year.
Since the January 1970
rate ceiling changes that enabled the S & L's to offer a significant
differential for term accounts, those liabilities have grown steadily
and strongly--at times at the expense of passbook accounts but creating
in the process a more stable deposit structure.
Alternative yields at
any given reinvestment period would have to be sufficiently higher
than the 5.75 per cent one-year and 6 per cent two-year deposit account
III - 15
ceilings to induce payment of the early withdrawal penalty for term
accounts before that segment of S&L claims would respond.
penalty is
(The minimum
one quarter's interest.)
COMPOSITION OF DEPOSITS OUTSTANDING AT
INSURED SAVINGS AND LOAN ASSOCIATIONS 1/
(Billions of dollars)
Total
Passbook
1969 - December
131.0
90.0
41.0
1970 - January
Total
Minimum Term Accounts
Over One Year
.6
129.6
85.8
43.9
April
July
131.6
134.6
82.3
81.9
49.3
52.7
19.0
26.0
October
137.9
82.4
55.5
29.6
1971 - January
April
144.2
152.7
83.3
86.5
60.9
66.2
35.0
39.5
1/
5.5
These account breakdowns are according to their original maturity.
The existing rate ceiling structure (adopted January 1970) permits
a 6 per cent rate on two-year minimum term accounts, 5.75 per cent
on one-year minimum term accounts, and 5.25 per cent on 90-day
notice accounts. The minimum penalty for early withdrawal is
forfeiture of 90 days'
interest.
Even if savings and loan deposit inflows were to drop off
suddenly and sharply this summer, it appears that the S & L's have
retained considerable leeway to honor their outstanding mortgage commitments during the summer--increased though they certainly are.
For one
thing, a significant portion of total outstanding commitments probably
represents refinancings of mortgages presently held by the S & L's,
which would require little new mortgage money from S & L's; this can
be inferred from the strong increase in
loans actually refinanced during
III - 16
the past three months as mortgage interest rates and lending terms eased
considerably.
More importantly, as the following table indicates, the
ratio of outstanding commitments to current and recent cash flow is
lower than it
has been in past years --
much
and the cash flow total used in
calculating the current ratio already excludes the $2.3 billion of
borrowed funds repaid to the FHLB.
In addition, associations now have
an unusually high liquid asset ratio, well above the record-high 7.5
per cent required by the FHLBB since May 1. 1/
1/
Liquid asset ratios consist of cash, US Government securities, and
US Agency issues maturing within five years, as a percentage of
the sum of deposit liabilities and borrowed funds due within one
year.
III - 17
SOURCES AND USES OF FUNDS AT INSURED SAVINGS AND
LOAN ASSOCIATIONS
(Billions of dollars)
March, April, and May
of
1971
1970
1968
1969
Sources
2.6
8.2
.4
.7
-.1
-2.3
2.1
3.6
.8
6.5
2.1
3.6
.9
6.6
2.5
3.2
.4
6.1
5.9
5.2
.7
11.8
.3
6.2
6.5
-6.6
6.6
1.4
4.7
6.1
.7
11.1
11.8
.5
.4
.3
1.02
1.19
1.10
1.7
Deposit accounts, net 1/
Borrowed funds
Subtotal
Gross mortgage repayments Other sources, net 3/
Total
1.4
Uses
Net increase in liquid assets
Gross mortgage acquisitions
Total
4/
Memoranda
Mortgage refinancings
Average ratio of outstanding
mortgage commitments to recent
cash flow 5/
1/
2/
3/
4/
5/
1.2
.86
Net change in deposits, including interest credited.
Includes, in addition to repayments, proceeds from sales of loans
and participations and miscellaneous credits. Excludes interest,
taxes, etc.
Includes net changes in loans in process, reserves and surplus,
and other liabilities minus the net changes in miscellaneous loans
and assets not set out separately in the "uses" statement.
Reflects all eligible liquid assets according to FHLB requirements.
For 1967 and 1968, includes only cash and U.S. Government securities.
Since 1968, includes also Federal agency issues maturing within five
years.
Represents the average of the monthly ratios produced by dividing
outstanding commitments plus loans in process by the sum of cash
flow in the current month and previous two months.
III - 18
Mortgage market.
Seasonally adjusted gr owth in new and out-
standing mortgage commitments at insured savings and loan associations
continued unusually strong during May.
The record amount of S&L
mortgage commitments outstanding at the end of last month, which was
more than twice the level a year earlier, was bolstered partly by
increased borrower demands to refinance old loans.
S&L mortgage commitment and lending activity has assumed
greater significance this year as other lender groups, including
Federal agencies, has provided less support to the mortgage market.
During the first quarter, the share of S&L net takings of mortgages
on all types of properties sharply increased to 58 per cent of net
acquisitions by all lender groups, as shown in the table.
With
respect to residential mortgages, the S&L share of net acquisitions
increased to 76 per cent of the total.
In April, indications are that
the S&L share of total net mortgage lending probably increased further.
S&L SHARE OF NET
MORTGAGE LENDING
1/
(Per cent)1/
Period
All mortgages
Residential mortgages
1968
1969
1970
34
35
40
44
44
50
1970 - IQ
IIQ
IIIQ
17
38
44
24
47
55
50
50
58
76
IVQ
1971 - IQ
1/
p/
Net increase in mortgages held by S&L's are share of total net
increase in mortgage debt outstanding.
Preliminary.
III - 19
In the primary market for conventional mortgages on new
houses, contract interest rates edged higher during May--the first rise
in
nearly a year.
Even so, returns on this type of investment continued
to lose ground relative to yields on new issues of high-grade corporate
bonds.
In May,
the average gross yield spread on such home mortgages
over corporate bonds declined to minus 13 basis points--the most
unfavorable margin in 7 months, and the fourth largest negative
spread in
the history of the mortgage series, which goes back to 1954.
CONVENTIONAL HOME MORTGAGES
Contract Rate
(Per cent)
Yield Spread
(Basis points above
corporate bonds)
1970 - High
8.60
50
1971 - January
February
March
April
May
7.95
7.75
7.60
7.55
7.65
71
47
14
- 2
-13
NOTE:
FHA series, rounded to nearest 5 basis points, for first mortgages
to finance purchases of new homes. Yield spread is mortgage
rate minus yield on new issues of high-grade corporate bonds.
In the more sensitive secondary market for Government under-
written mortgages, FNMA conducted a special auction of its purchase
commitments on June 9.
This auction was aimed at reducing the speculative
overhang of home mortgages, including warehoused loans, held by mortgage companies and others without firm purchase commitments from private
III
investors.
- 20
In the special auction, FNMA accepted $274 million of the
$1,097 million total offers submitted for immediate delivery of FHA
and VA loans bearing the current ceiling rate of 7 per cent.
FNMA's
unprecedented action apparently helped to stabilize this sector of the
market, as suggested by the slightly lower level of yields indicated
on 6-month purchase commitments in FNMA's regular June 14 auction
compared with the results of the June 1 auction.
However, average
discounts associated with these purchase commitments remained quite
restrictive, even after allowance for the unusual conditions prevailing
in the secondary market during recent weeks.
FNMA REGULAR PURCHASE AUCTIONS
Amount of total offers
Received
Accepted
(Millions of dollars)
1971 - High
314 (4/26)
9.4 (6/1)
8.18 (6/1)
127
687
54
314
3.7
4.4
7.45
7.54
1,168 (5/10)
April 12
26
6-month commitments
Private
Discount
market yield
(Per cent)
(Points)
May
10
24*
1,168
786
237
152
5.6
7.8
7.68
7.97
June
1*
14
324
664
147
191
9.4
9.2
8.18
8.15
Average secondary market yield after allowance for commitment fee
and required purchase and holding of FNMA stock, assuming prepayment period of 15 years for 30-year Government-underwritten
mortgages. Implicit yields shown are gross, before deduction of
fee paid by investors to servicers of 38 basis points.
*Dollar limits were announced in advance by FMMA on the total offers it
would accept, and on the total competitive offers that any one bidder
could make.
NOTE:
III - 21
Corporate and municipal securities markets.
Corporate and
municipal bond yields have fluctuated widely since mid-May, as a
highly sensitive market reacted to swings in short-term interest
rates and to diverse announcements about the domestic and international
outlook.
Following yield declines late in May and early June, long-
term rates began to move up sharply, in anticipation of a rise in the
prime rate, as well as in expectation of a shift to a more restrictive
monetary policy stance.
By mid-June, long-term yields in the corporate
markets were within 20 basis points of their 1971 high reached in
mid-May, while tax-exempt yields edged above their previous peak in
mid-May.
More recently, a new Aaa-rated Bell System debenture was
offered to yield 7.80 per cent, appreciably below comparable yields
in the weak ending June 18.
This offering was not well received by
investors.
Over the last few days, stock prices have declined sharply
on relatively large volume.
According to the financial press, the
immediate cause for the decline was the announcement of a relatively
low May level of mutual fund liquidity and an unprecedented net
redemption of mutual fund shares during May; other bearish factors
included concern about the strength of economic recovery and the recent
increase in interest rates.
Prior to the recent decline, stock prices
on both the New York and American Exchanges had been relatively stable
III - 22
Combined NYSE and AMEX volume, though
for the previous four weeks.
still high by historical standards, had been somewhat lower than the
average level prevailing from January through April of 1971.
BOND YIELDS
(per cent)
New Aaa
Corporate Bonds 1/
Long-term State
and Local Bonds 2/
7.68 (12/18)
9.30 (6/18)
5.33 (12/10)
7.12 (5/28)
6.76 (1/29)
8.23 (5/21)
5.00 (3/18)
6.00 (6/18)
1970
Low
High
1971
Low
High
Week of:
May
21
28
8.23
8.06
5.96
5.86
June
4
11
18
7.79
7.93
5.70
5.87
6.00
1/
2/
8.05
With call protection (includes some issues with 10-year protection).
Bond Buyer (mixed qualities).
When interest rates began to rise in June, a number of
corporations postponed issues.
It is now estimated that total June
public bond offerings will be about $2.2 billion.
Filings for July
are relatively low, especially in the utility sector; and, even with
the rescheduling of several issues from June, the staff estimates
III - 23
that July volume will be about $1.7 billion.
This would be the first
time in almost a year that public bond volume dropped below $2 billion,
but it is still significantly above the average monthly volume in this
market in any year before 1970.
New stock issues continued at high levels, even aside from
the $1.4 billion AT&T rights issue, which will boost the July total
to a record level.
The relatively high level of public bond offerings
and the surge in equity financing, combined with an apparent pickup
in private placements in recent months, have resulted in a near-record
monthly average volume of total corporate security offerings from
April through July.
CORPORATE SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)
Bonds
Public
Private
1969 - Year
1,061
468
700
2,229
1970 - Year
2,099
403
713
3,245
1971 - QI
e/
Stocks
Total
2,790
505
769
4,063
QIIe/
2,187
550
1,033
3,770
Maye/
JuneJuly-
2,200
2,200
1,700
500
700
500
900
900
2,000
3,600
3,800
4,000
Estimated.
III - 24
Although total second-quarter volume of State and local longterm debt issues is below the record first-quarter level, tax exempt
bonds are still being offered at levels close to $2 billion a month.
In the last few weeks, the pace of acquisitions by both banks and fire
and casualty companies has slackened somewhat, and this has exerted
upward pressure on municipal yields.
Municipal demands for long-term
funds have not abated, but there may be some seasonal tapering in new
issues in July.
STATE AND LOCAL GOVERNMENT OFFERINGS
(Monthly or monthly averages, in millions of dollars)
Long-term
Net Short-term
1969 - Year
1970 - Year
991
1,515
294
383
1971 - QI
QIIe /
2,230
1,996
535
436
May£/
Junee /
2,200
1,900
207
100
July .
1,800
n.a.
Estimated.
e/
NOTE: Long-term offerings are gross. Short-term offerings are Federal
Reserve Board estimates of net sales.
Net short-term offerings by State and local governments fell
in May and June.
Even though gross short-term issues averaged more than
$2 billion a month over the second quarter--rising to an anticipated
$3 billion in June--the increasing volume of maturing issues largely
offset the recent rise in
gross offerings,
with a number of governments
apparently deciding to fund their maturing short-term obligations rather
than renew them.
III - 25
Government securities market. Interest rates in all sectors of the
government securities market rose sharply in the interval between the early
June Open Market Committee meeting and mid-June.
Initially, expectations of
a tightening of monetary policy and later the observed higher rate levels in
the Federal funds market--above the discount rate--contributed to marked downward adjustments in security prices.
Also the moves by the two banks to raise
their prime interest rates and anticipations of large Treasury borrowing needs
added to cautious attitudes.
Since mid-month, however--and since Treasury's
announcement of financings on June 16 (for details see section on Federal
Finance)--the Government securities market recovered and prices have tended
to move higher.
MARKET YIELD ON U. S.
GOVERNMENT AND AGENCY SECURITIES
(Per cent)
1971
Daily lows 1/
Daily highs 1/
Weekly average for week ending
June 15 June 22
June 8
June 1
Bills
1-month
3-month
6-month
1-year
4.83
5.02
5.22
5.54
(1/6)
(6/15)
(6/16)
(6/22)
2.07
3.22
3.35
3.45
(3/12)
(3/11)
(3/11)
(3/11)
4.27
4.36
4.51
4.74
4.22
4.36
4.59
4.90
4.54
4.78
4.97
5.27
4.75
4.93
5.14
5.46
6.61
6.76
6.86
6.73
6.56
(6/15)
(6/15)
(6/15)
(6/15)
(6/15)
4.27
4.74
5.15
5.38
5.69
(3/22)
(3/22)
(3/23)
(3/23)
(3/23)
5.87
6.21
6.38
6.37
6.26
5.91
6.24
6.39
6.28
6.22
6.32
6.57
6.69
6.55
6.42
6.49
6.61
6.72
6.62
6.47
5.72
6.11
6.92
7.12
(6/22)
(6/21)
(6/22)
(6/1B)
3.67
3.93
4.70
5.12
(3/16)
(3/16)
(3/24)
(3/23)
5.19
5.69
6.45
6.68
5.12
5.58
6.36
6.67
5.39
5.80
6.56
6.84
Coupons
3-year
5-year
7-year
10-year
20-year
Agencies
6-month
1-year
3-year
5-year
1/
Latest dates of high and low rates in parenthesis.
5.70
6.09
*,69
7,08
III - 26
On balance, yields in the bill market have risen 30 to 50 basis
points, while intermediate-term yields are up by about 25 basis points.
Rates in the coupon sector adjusted sharply upward during the two trading
days when the Federal funds rate reached a level of 5 per cent and when
some prime rate increases were announced.
At the time of the peak in' yields--
on June 15--intermediate-term interest rates had increased by as much as 40
basis points from June 7, but since then a fair-sized rally has developed.
During the period since June 7, dealers' positions have been moderate,
suggesting a cautious attitude by dealers.
DEALER POSITIONS IN GOVERNMENT AND AGENCY SECURITIES
(In millions of dollars)
May
May 28
June 7
June 14
June 21
2,645
2,882
2,611
2,554
1,870
Treasury bills (total)
1,785
2, 268
2075
2,059
1,446
Due in 92 days or less
473
362
447
611
314
93 days or over
1,311
1,906
1,629
1,448
1,132
861
614
535
496
424
327
247
221
254
261
1-5 years
192
132
129
95
41
over 5 years
341
236
187
147
123
819
926
798
777
758
Due within 1-year
400
437
381
401
394
1-year
419
489
417
376
364
Daily average
Treasury securities
Total
Treasury notes and bonds
(Total)
Due within 1-year
Agency securities
Total
Over
III - 27
In the market for Federal agencies, new issue activity has been
relatively light in June.
Responding to the general upward movements in
interest rates, yields on agency issues have increased by around 35 to 55
basis points since June 7.
Over the past three weeks, short-
Other short-term credit markets.
term rates, with the exception of finance company paper, continued their
upward movement, with gains ranging up to 76 basis points.
Several rates--
notably those on three-month commercial paper and on bankers' acceptances-are now above the 5-1/2 per cent prime rate.
However, commercial paper rates
have lagged the very sharp rise in bill rates, the spread narrowing between
commercial paper and Treasury bills in the three-month maturity range from
137 basis points on June 2 to 78 basis points on June 16.
On a seasonally-adjusted basis, finance company paper outstanding
showed a decline of $361 million for May.
Large long-term borrowings on the
capital market early in the month by several finance companies and the May
increase in bank loans to nonbank financial institutions suggests that these
have been alternative sources of funds.
Weekly data for June, however, do
show a substantial increase in finance paper outstanding.
Total commercial and finance company paper fell by more than $400
in
million May to $30.7 billion, the lowest outstanding amount since September 1969.
Dealer paper outstanding continued to decline somewhat during May at a time
when business loans expanded substantially.
III - 28
SELECTED SHORT-TERM INTEREST RATES
(Wednesday Quotation-- Discount Basis)
1970
High Lows
June 2
1971
June 9
June 16
Net change
June 2-June 16
1-month
Commercial paper
Finance paper
Bankers' acceptances
Certificates of
9.25
9.00
9.00
5.50
5.00
5.50
5.25
5.00
5.25
5.13
deposit--new issue 1/
Treasury bill
7.75
7.84
5.00
4.58
Bankers' acceptances
9.25
8.25
9.00
Certificates of
deposit--new issue 1/
Treasury bill
+13
5.38
5.38
5.00
5.63
4.88
4.21
5.00
4.40
5.25
4.74
+37
+53
6.00
5.50
5.50
5.63
5.00
5.38
5.63
5.00
5.50
5.75
5.00
5.75
+12
6.75
7.93
5.50
4.74
5.13
4.26
5.25
4.60
5.50
4.97
+37
+71
9.00
7.99
5.50
4.78
5.38
4.46
5.50
4.82
5.75
5.22
+37
+76
Certificates of
deposit--new issue.l
Treasury bill
7.50
7.62
5.50
4.74
5.50
4.75
5.50
5.14
5.63
5.47
+13
+72
Prime municipal notes
5.80
2.95
3.20
3.30
3.45
5.00
--
+38
3-month
Commercial paper
Finance paper
+37
6-month
Bankers' acceptances
Treasury bill
12-month
1/
Investment yield basis. Highs for certificates of deposit are
ceilings effective as of January 21, 1970.
Source:
Wall Street Journal's Money Rates for commercial and finance
paper and bankers' acceptances; all other data from the
Federal Reserve Bank of New York.
III - 29
COMMERCIAL AND FINANCE COMPANY PAPER
(End-of-month data, in millions of dollars)
MEMO:
March
April
May
Peake values
(May 1970)
Total commercial and
finance paper 1/
Bank related 2/
Nonbank related 3 /
Placed through dealers
Placed directly
30,954
31,163
30,730
39,318
1,692
29,262
12,880
16,382
1.794
29,369
12,448
16,921
1,748
28,982
12,422
16,560
7,600
31,718
12,686
19,032
4/
5/
Net Change from
Previous Month
Total commercial and
finance paper 1/
Bank related 2/
Nonbank related 3/
Placed through dealers
Placed directly
1/
-1,620
+209
-433
- 209
-1,411
- 878
- 533
+102
+107
-432
+539
- 46
-387
- 26
361
Combines seasonally adjusted nonbank-related paper and seasonally
adjusted bank-related paper.
Seasonally unadjusted.
Seasonally adjusted.
This component showed a peak of $7,820 in July 1970.
This component showed a peak of $19,112 in April 1970.
Federal finance.
The staff continues to estimate a Federal deficit
in the current fiscal year of about $22 billion.
be known until late July.)
(The actual figures will not
In regard to fiscal year 1972, preliminary Staff
estimates suggest a Federal deficit of about $23 billion but the outlook is
still
highly uncertain because Congress has not completed action on a number
III - 30
of important bills.
The two most significant developments since the last
Greenbook relate to military pay and public service employment.
The Senate recently passed an amendment to the Selective Service Act
that is similar to legislation already passed in the House increasing the
total military pay bill by $2.8 billion annually, in a move toward an all
volunteer army.
This Senate action was unexpected because the Senate had
previously rejected the larger House appropriation in the favor of a smaller
($1.2 billion) Administration request.
Earlier Staff estimates had allowed
for a middle ground $1.8 billion outlay for this program in fiscal 1972, but
now incorporate the larger $2.8 billion increase.
Another recent development involves reports that the Administration
may not veto the public service employment bill now being deliberated by the
House-Senate conference committee.
Passage of this bill had been previously
assumed in the Staff expenditure estimates.
During the first half of June the Treasury's
cash balance was
substantially below projected levels and the Treasury resorted to special
borrowing from the Federal Reserve.
The shortfall in the cash balance was
due in part to higher-than-expected expenditures early in the month and to
the redemption of special issues held by foreigners.
While the special
borrowing from the Federal Reserve was repaid following the seasonal midmonth inflow of tax receipts, the Treasury's cash balance was still relatively
low and, thus, the Treasury announced on June 16 plans to auction $2.25 billion
of 16-1/2 month notes, payable on June 29, and $1.75 billion of tax bills
payable on July 6.
As a result of this financing announcement, the Staff
estimate of the end-of-June cash balance has been revised upward to about
$7.8 billion.
III - 31
Current staff estimates suggest that net Treasury borrowing from the
public will be about $23 billion in the second half of calendar 1971, a record
for recent half-years and nearly $7 billion higher than last year.
Relative
to GNP, net Treasury borrowing has been higher in only two periods since
1950--the second half of calendar years 1953 and 1967.
Net Treasury borrowing
for the period between late June and late August is now estimated to be about
$11.0 billion.
However, the specific timing and amounts of future Treasury
market borrowing operations will be significantly affected by what happens to
the special issues held by foreign central banks.
A recent Treasury announce-
ment indicates that the June 21 weekly bill auction will be increased by $100
million, and the Staff estimates assume that the Treasury will continue this
addition to its regular weekly bill auctions for some time.
Given these
assumptions, the Treasury will need to go to the market for approximately
$2.5 billion in new money late in July and a smaller amount sometime in
August.
The July borrowing might be tax bills maturing next spring, and
perhaps the Treasury will obtain its new money in August in conjunction with
the quarterly refunding.
III - 32
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Other (debt repayments, etc.)
Plus:
Other net financial sources b/
Plus:
Budget surplus or deficit (-)
Equals:
Change in cash balance
Memoranda:
June
July
-1.1
6.8
Aug.
.1
.1
w-
2.3
-- /
-3.5=
-1.9
3.6
.6
4.5
--
2.6
.1
-. 4
-7.2
-3.5
-. 3
-. 6
-1.8
Level of cash balance,
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays
Maturing coupon issues
held by public
22.6
19.0
13.5
20.7
--
16.1
19.16
4.1
Net agency borrowing
a/
b/
Includes about $1.0 billion in redemptions of Treasury securities
issued to foreign central banks during May.
Checks issued less checks paid and other accrual items.
III - 33
FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
Fiscal 1971e/
Jan.
F.R.
Budget Board
Fiscal 1972e/
Jan.
F.R.
Budget Board
Calendar
Year
1971e/
F.R. Board Staff estimates
Calendar Quarters
1971
1972 e/
I*
IIe/
IIIe/
IVe/
I
II
Federal Budget
(Quarterly data, unadjusted)
Surplus/deficit
Receipts
Outlays
-18.6
194.2
212.8
-22.0
189.0
211.0
-11.6
217.6
229.2
-23.5
211.0
234.5
-27.5
194.8
222.2
-8.2
44.1
52.2
2.6
57.3
54.7
-10.9
49.2
60.1
-12.0
44.2
56.2
-8.3
50.8
59.1
7.7
66.8
59.1
Means of financing:
Net bbrrowing froit the public
17.6
Decrease in cash operating balance n.a.
Other 1/
n.a.
19.0
.2
2.8
10.6
n.a.
n.a.
22.0
.5
1.0
25.1
.3
2.0
1.6
3.6
2.9
1.1
-3.3
-.4
9.0
.7
1.2
13.4
-.6
-.8
4.6
1.7
2.0
-5.0
-1.3
-1.4
Cash operating balance, end of periodn.a.
7.8
n.a.
7.3
7.8
4.5
7.8
7.1
7.7
6.0
7.3
Memo:
1.7
n.a.
n.e.
n.e.
-1.0
-0.3
1.2
n.e.
n.e.
n.e.
-4.2
225.9
236.1
-19.0
216.8
235.8
-1^.8
205.5
224.3
-16.0 -20.8
198.2 202.2
214.2 223.0
-22.0
206.9
228.9
-.4
-.4
Net agency borrowing 2/
n.a.
National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
expehditures
-15.0
200.6
215.0
High empl6ytent surplus/deficit
(NIA basis)
n.a.
-16.7
196.8
213.5
-.2
n.a.
1.3
-2.0
-2.6
-16.4 -20.2 -17.5
214.6 219.8 225.7
231.0 240.0 243.2
1.6
-1.7
1.0
.a.--not available
e--projectedL n.e.--not estimated
* Actual
1/ Includes such items as deposit fund accounts and clearing accounts.
2/ 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.
The level of the estimated series shown here differs considerably
3/ Estimated by Federal Reserve Board Staff.
Continues to show effect of accelerated depreciation
from the estimates by the Council of Economic Advisers.
proposed by the Treasury.
'6/22/71
III-C-1
FINANCIAL DEVELOPMENTS - UNITED STATES
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, RATIO SCALE
MONEY AND TIME DEPOSITS
SAVINGS ACCOUNTS
SAVINGS & LOAN ASSN.
-1220
MONEY
MAY 2241
- 200
.UTUAL
SAVINGS BANKS
M
TIME DEPOSITS
MAY 761
MAY 2513
________________ T
I
1l
1969
Il
1
l
l
11111 1111 111
1971
1969
I'I
H II
II7
I'.1I
6/22/71
III-C-2
FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED NONFINANCIALSECTORS
BILS
SHARES IN fUNDS SUPPLIED
PERCENT
SEASONALY ADJUSTED
ANNUAL RATE
NON8ANK FINANCE
-
G 1018
y
e
S50
TOTAL
COMMERCIAL BANKS (ANDAFFIUATES)
LESS FEDERAL GOVERNMENT
L [
I_
S1
J I I
HOUSEHOLDS AND BUSINESS
-10(
NETFUNDS RAISED
CI 763
NETCAPITAL OUTLAYS
QI 661
-
1969
5(
1971
YIELDS SHORT-TERM
PERCENT
FEDERAL FUNDS
MAY
463CO
COMMERCIAL PAPER
4MONTHS L
MAY 510
.kA-8
/
CORPORATE
l
I
V
I
t
I
I
I
STATE AND LOCAL GOVERNMENT
1971
11970
D
MAR.
JUNE
SEPT.
OEC.
1 1iI I
I50
IV - 1
THE ECONOMIC PICTURE IN DETAIL
International Developments
Foreign exchange markets.
In the three weeks since the
last Greenbook the German Federal Bank has undertaken to sell off a
large amount of its dollar reserves in order to reduce the domestic
monetary base swollen by the speculative inflows of early May.
Such sales during June 2-4 amounted to about $150 million, but have
since averaged roughly one-quarter of a billion dollars per day.
Netting out some $500 million received on maturing forward contracts,
the Bundesbank's reserves have declined by nearly $1.9 billion thus
far in June.
As a result of the Bundesbank's large sales of dollars
(purchases of marks), the spot DM appreciated rather steadily, reaching a high of 28.62 U.S. cents, i.e., 4.8 per cent above par,on June 23.
The Bundesbank's reserve drain, and the consequent contraction
of the domestic monetary base, has led to a considerably tightening of
the German money market.
Call money has risen from around 4 per cent
on June 1 (and much less in May) to over 8-1/2 per cent currently.
Three-month funds in Frankfurt, around 6-1/8 per cent at the first
of the month,are now quoted at about 7 per cent.
The reversal of
the differential between German and Euro-dollar interest rates,
combined with the firming of the spot DM, has led to a sharp narrowing
of the premium on forward DM. Three-month forward marks were quoted
IV - 2
at a premium of about 4 per cent per annum the first two days of
this month; this premium has fallen to less than 1/4 per cent per
annum at present.
It is not yet completely clear what has happened to the funds
coming out of marks.
Of course, we can never trace the movement of
particular funds, but it appears that of the reserves released by the
Bundesbank's dollar sales plus those currently generated by the U.S.
liquidity deficit, something over $1-1/4 billion was "absorbed" by
net reserve gains of Japan and the U.K.
A much smaller amount seems
to have returned to the United States through the Euro-dollar market
as U.S. banks increased their liabilities to their foreign branches
(see Euro-dollar market), thereby holding down the U.S. official
settlements deficit.
The Bank of Japan made intervention purchases of dollars
totaling nearly $900 million this month, through the 23rd.
The U.K.
has had spot market intervention purchases totaling just over $200
million, but there are indications that the Bank of England has had
additional dollar receipts on maturing forward contracts.
Sterling
has held fairly close to the upper limit for the past three weeks,
partly reflecting reported oil company purchases, but perhaps also
reflecting some interest-induced movement of funds into London.
Very
short-term sterling interest rates (over-night and seven-day) have
generally been 1/2 per cent or so above comparable Euro-dollar rates.
IV - 3
Other major European currencies have generally eased over
the past couple of weeks, and there has been only scattered intervention by central banks in those markets.
The Belgian franc rate
weakened sharply on June 10, when the central bank imposed a 100 per
cent marginal reserve requirement on Belgian banks' net foreign liabilities.
The rate remained depressed until June 23, when it suddenly
jumped almost to the ceiling.
The Dutch guilder, after advancing sharply
in the first few days following the Bundesbank's initiation of dollar
sales, has eased substantially, and is currently only 1.6 per cent
above its parity rate.
The Canadian dollar has declined by roughly one full cent
this month to 97.7 U.S. cents at present, with the Bank of Canada
providing modest support.
Recent rises in U.S. short-term interest
rates relative to Canadian rates are generally regarded as being the
most important factor in the weakening of the Canadian dollar.
In official transactions in June, the U.S. Treasury drew
$150 million equivalent in Belgian francs and $100 million equivalent
in Dutch guilders on the IMF.
The proceeds were used to repay $150
million of System swap drawings on the Belgian National Bank, reducing
the outstanding amount to $340 million, and to reduce by $100 million
the Netherlands Bank's holdings of uncovered dollar reserves.
The
Treasury also sold $50 million equivalent of gold to the Swiss National
Bank.
IV - 4
Some relaxation in the speculative
Euro-dollar market.
atmosphere in foreign exchange markets and a sizable flow of funds
out of the German mark (and
to a lesser extent the Swiss franc)
have contributed to a fairly steady decline in interest rates in the
Euro-dollar market since around the end of May -- in the face of
recent advances in U.S. interest rates.
One- and three-month Euro-
dollar deposit rates are now about 6-3/4 to 7 per cent, compared to
about 8 per cent in late May and the first few days of June -- still
well above their January-April average level
cent and about
of roughly 5-1/2 per
1-1/2 per cent above domestic CD ratee of
comparable maturity.
The overnight Euro-dollar deposit rate has
SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
Average for
month or
week ending
Wednesday
1971
January
February
March
April
May
(1)
OverNight
Euro-$/
Federal
Funds 2 /
5.23
4.38
4.43
5.05
8.52
4.14
3.72
3.76
4.15
4.63
June
15.93
5.04
4.64
4.50
2
9
16
23
(2)
4.82
4.77
4.89
4.982/
(3)=
(1)-(2)
Differential
1.09
0.66
0.67
0.90
3.89
11.11
0.27
-0.25
-0.482/
(4)
3-month
Euro-$
Depositi/
(5)
(6)
60-89 day (4)-(5)
DifferCD rate
/
(Adl.g
ential
5.92
5.54
5.11
5.92
7.04
5.10
4.34
3.79
4.41
4.97
0.82
1.20
1.32
1.51
2.07
7.70
7.31
7.19
6.99
5.26
5.36
5.41
5.412/
2.44
1.95
1.78
1.582
1/ All Euro-dollar rates are noon bid rates in the London market; over
night rate adjusted for certain technical factors to reflect the effective
cost of funds to U.S. banks.
2/ Effective rate.
3/ Offer rate (median, as of Wednesday) on large denomination CD's
by prime banks in New York City; CD rate are adjusted for the cost of
p/ Preliminary.
required reserves.
IV - 5
declined quite markedly in the last few weeks and of late has been
about 1/4 to 1/2 per cent below the Federal funds rate.
(See table.)
The low level of overnight Euro-dollar rates relative to
longer maturities may reflect funds that have moved out of German
marks which have been temporarily placed in Euro-dollars prior to
repatriation to the U.S.
or other countries shortly before the
quarter-end; if so, we may expect a sharp firming in Euro-dollar rates
(particularly in the shorter maturities) in the last few days of
June --
coupled with a decline in liabilities of U.S. banks to their
foreign branches reflecting these repatriations (including U.S.
company repatriations under OFDI guidelines).
Gross liabilities of U.S. banks to their foreign branches
increased by about $0.6 billion in the three weeks through June 16;
from then to June 21 (the last day for which data are available as
of this writing) these liabilities have shown little net change.
These liabilities plus foreign branch holdings of special Ex-Im
and Treasury notes totaled about $5.3 billion as of June 21.
On the basis of partial data it
banks'
is
estimated that U.S.
Euro-dollar borrowings and foreign branch holdings of the
above mentioned notes averaged about $0.3 billion 1ess in
weeks ended June 9 than in
the four
the previous four week Euro-dollar
borrowing reserve requirement computation period,
decline of about $0.4 billion the period before.
compared to a
IV - 6
U.S. balance of payments.
Over the past four weeks the
overall balance on the liquidity basis has shown deficits averaging
over $100 million a week according to preliminary information.
In addition to the underlying deficit, it is probable that nonbank
funds have continued to move to the Euro-dollar market and also,
through commercial leads and lags, into the Japanese yen.
On the
official settlements basis, the average balance in the past four
weeks has been very small, as borrowing by U.S. banks from their
foreign branches has picked up.
With respect to the underlying deficit, there is a strong
possibility that developments in trade (as noted below) have been
unfavorable.
See page IV-8.
Detailed information now available on first-quarter
transactions shows that about two-thirds of the worsening in the
seasonally adjusted liquidity deficit between the fourth quarter
of 1970 and the first quarter of this year resulted from an increase
in outflows of U.S. capital attracted by higher interest rates abroad
and the possibility of changes in foreign exchange rates.
Errors and
omissions, the changes in which are presumed to represent largely
unidentified capital outflows, increased by more that $1 billion from
the fourth quarter.
Net outflows of U.S. corporate capital increased
by $3/4 billion in the first quarter; this reflected not only a
substantial increase in direct investments in affiliates abroad but
IV - 7
also a swing in the recorded movement of U.S. corporate short-term
funds held abroad, from inflows in the fourth quarter to outflows
in the first quarter.
The same factors that were responsible for
the large increase in errors and omissions, i.e., widening differentials
between interest rates here and abroad and exchange market uncertainties,
promoted these shifts in the flows of corporate capital.
These adverse changes were only partially offset by an
improvement in the first-quarter balances on both goods and services
and a temporary reversal of the flow of bank lending to foreigners.
The increase in the trade balance stemmed from a peaking in exports
of agricultural commodities, from exceptionally large deliveries of
jumbo jets, and from an upturn in shipments of automobile parts
following the termination of the GM strike.
This trade improvement
appears to have been transitory and was followed by a deficit in
April.
Imports may again have exceeded exports in May, as discussed
below.
The favorable balance on services in the first quarter rose
further -- by $1 billion at an annual rate -- following a nearly
equally large rise from the third to the fourth quarter of last year.
These increases resulted mainly from a reduction in net payments
on military transactions as transfers under sales contracts rose,
and an increase in net income receipts as income payments fell with
the decline in domestic interest rates.
IV - 8
Based on partial information (custom
U.S. foreign trade.
receipts, number of shippers'
commodity data),
it
export declarations,
appears that the U.S.
and certain
trade balance in May
improved only very moderately from the $300 million import balance
(balance of payments basis -April.
not at annual rate) recorded in
Exports are estimated to have increased from the relatively
low April level but imports in May are estimated to be about as
high as the record April value.
The official statistics may be
available for inclusion in a supplement to the Greenbook.
While much of the poor trade showing this year can be
attributed to the exceptional strength in imports, it also appears
that the U.S. share of world trade in manufactured goods slipped
further in the first quarter of 1971.
The U.S. share in that
period was more than one percentage point lower than in the
corresponding period a year earlier -annual loss of over $1-1/2 billion.
first
roughly equivalent to an
The U.K.'s position in the
quarter of this year also weakened while the shares of Germany
and Japan rose very sharply.
Commodity-by-commodity information on market shares is
yet available for the first
quarter of this year, but a recent
not
Department of Commerce report indicated that in calendar 1970
declines occurred in all major product groups except chemicals in
which our share was unchanged.
(The drop in the U.S.
share in
1970 was particularly pronounced in transport equipment, partly
IV - 9
because of the GM
strike.)
Although U.S. exports of electric
and nonelectric machinery increased by 13 and 17 per cent,
respectively, from 1969 to 1970, sales of other countries increased
even faster, resulting in a substantial reduction in our share
in world exports of machinery.
IV - 10
Interest rate movements in major industrial countries.
Domestic short-term interest rates in most major European countries
registered net declines in the second quarter.
After decreasing every-
where in Europe in April, short-term yields subsequently either held
steady or moved upward, but only in France -- where monetary policy
was tightened in May --
are interest rates now higher than they were
at the end of the first quarter.
The drop in domestic yields in April occurred despite a rise
in Euro-dollar rates that began in mid-March (and continued through May)
but followed a prolonged downward movement in Euro-dollar yields dating
from mid-1970.
In June Euro-dollar rates again decreased, reflecting
in part net large-scale purchases of marks (sales of dollars) by the
Bundesbank. Simultaneously, German money market yields have risen under
the consequent tightening of liquidity pressures.
The fall in European money market rates early in the second
quarter was in line with the policy in several countries of seeking to
halt or reduce dollar inflows.
However, in Germany and in the Netherlands,
the decline in short-term yields was largely in response to the increased
liquidity resulting from the continuation of capital inflows.
Narrowing the differentials between domestic and Euro-dollar
yields was the prime reason for the discount rate reductions in late
March and early April in Belgium, Germany, the United Kingdom and the
Netherlands.
IV - 11
In Germany,
it
was hoped that a reduction of dollar inflows
would support domestic demand-restraint policies by making it
to restrict the liquidity of the banking system.
easier
The cut in the German
discount rate was accompanied by a reduction in rediscount quotas and
intensification of the Bundesbank's open market operations with nonbanks.
In the Netherlands, where inflationary pressures were particularly
intense, there was no easing of previously imposed strict quantitative
controls on credit expansion.
In Britain, on the other hand, lower interest rates were in
harmony with the policy of stimulating the economy adopted by the government
SELECTED SHORT-TERM INTEREST RATES 1/
1971
Apr.
May
Latest
Jan.
Feb.
Mar.
United Kingdom
7.35
7.68
7.70
6.78
6.53
6.44 (6/11)
Switzerland
Japan
Canada
5.00
7.38
4.50
4.75
7.25
4.46
4.25
7.25
3.26
3.65
6.75
3.00
3.50
6.56
2.98
3.50 (/611)
6.50 (6/11)
3.03 (6/22)
Belgium
Germany
Netherlands
France
6.91
7.50
1.46
6.44
6.28
7.41
5.41
6.00
5.17
7.57
3.50
5.72
4.60
6.41
1.19
5.61
4.80
6.14
1.71
5.87
4.80
6.88
2.25
6.00
Italy
5.50
5.50
5.00
4.75
n.a.
Euro-dollar
5.89
5.68
5.25
5.94
7.22
7.06 (6/22)
United States
4.30
3.57
3.27
3.76
4.06
4.94 (6/22)
(6/21)
(6/18)
(6/14)
(6/10)
1/ Rates quoted are monthly averages, generally for 3-month funds, as
Italy and Switzerland, time deposits; Germany, interbank loan
follows:
rate; United Kingdom, local authority deposit; Canada and United States,
Treasury bills; Belgium, tap rate on Treasury bills; Euro-dollar deposit;
France, the Netherlands, and Japan, call money rate. Latest rates are
for the dates in parentheses.
IV - 12
at the end of March.
In Belgium, too, reduced rates were not unwanted
in the light of an anticipated slowdown in domestic growth this year.
And declining short-term yields were also welcomed as a tool for
promoting economic expansion in Italy, where a downward trend in
interest rates that began in the summer of 1970 was given additional
impetus by cuts in central bank lending rates in January and April.
Reducing the spread between domestic and Euro-dollar rates
helped decrease net capital inflows into Britain.
In Germany, however,
the demand for marks did not diminish appreciably in April.
When capital inflows based on expectations that the mark would
be revalued became overwhelmingly large at the beginning of May, differentials between yields on domestic assets in the Netherlands and comparable
Euro-dollar deposits also became irrelevant.
The Dutch guilder, along
with the Austrian schilling, was subjected to intense speculative demand
on the correct assumption that their parities could not survive a
revaluation or unpegging of the mark, which was in fact floated on May 9.
Speculative demand outweighed interest rate considerations in
Switzerland and Belgium, too, where revaluations were also expected
(contrary to the event in the case of the Belgian franc) as part of the
general upheaval in the exchange markets.
Outside of Europe, short-term Canadian interest rates fell in
the first two months of the year and have since been flat.
The stability
of Canadian rates in the face of rising yields in the United States
reflects, in part, an attempt by the Canadian authorities to ease upward
pressure on the exchange rate of the Canadian dollar in order to aid
IV - 13
Canadian export industries, whose profits have suffered from the
appreciation of the Canadian dollar.
Furthermore, low interest rates
are part of the overall stimulative policy now being pursued by the
government.
Japanese short-term rates have declined this year, reflecting
a loosening of monetary policy.
In general, long-term interest rates fell substantially in
late 1970 and in early 1971.
In Germany, the United Kingdom and Canada
there have been subsequent sharp upturns.
In Germany, the rise in long-
term yields was initially the result of profit taking but, more recently,
has reflected efforts by businesses to replace heavy short-term debt
obligations with longer-term liabilities.
In the United Kingdom, yields
have risen during the second quarter largely in response to expectations
of continuing inflation and to doubts about the long-term balance of
payments outlook.
In Canada, increased demand for funds has combined
with a revival of inflationary expectations to push up long-term rates.
In France, the recent tightening of monetary policy has driven bond
yields up.
Elsewhere, there have been no pronounced movements in bond
prices in recent months.
After declining substantially in April, German money market
rates have risen in June as the liquidity of the banking system has been
reduced.
Earlier, German interest rates had shown little change during
the first quarter.
The combination of a ready supply of Euro-dollars,
strong demand for funds by both bank and nonbank borrowers in Germany,
IV - 14
and a large and widening differential between German and Euro-dollar
rates -- the uncovered monthly average excess of the three-month interbank loan rate over the 90-day Euro-dollar deposit rate widened from
1.63 percentage points in January to 2.49 percentage points in March -helped produce major capital inflows.
Though a large portion of these inflows was absorbed or offset
by restrictive reserve requirements and open market sales by the Bundesbank,
bank liquidity expanded to the point where the government felt that its
stabilization program was in jeopardy.
Consequently, the Bundesbank
lowered its discount rate from 6 to 5 per cent on April 1 and its rate
on advances, which is more closely related to market rates, from 7-1/2 to
6-1/2 per cent.
Domestic rates subsequently fell in April.
Coupled with
rising Euro-dollar rates, this drastically reduced the gap between the
latter and German money market rates.
The three-month interbank loan
rate did not exceed the return on 90-day Euro-dollar deposits by more
than half a point at any time in April, and in early May -- before the
mark was floated -- the 90-day Euro-dollar rate rose above the interbank
loan rate.
Capital inflows -- which were the main cause of the drop in
interest rates -- remained heavy through much of April, reflecting strong
expectations of a rise in the mark exchange rate.
This was indicated by
the relatively small decrease in the covered differential in favor of
the interbank loan rate, despite the marked change in the uncovered
differential.
IV - 15
For almost a month after the mark was floated, short-term
rates remained stable; but in early June rates rose, as the capital
inflows in the period before the mark was floated were reversed by
Interest rates in June
large-scale dollar sales by the Bundesbank.
have also been pushed up by a rise in minimum reserve requirements on
June 1 and by mid-year balance sheet positioning,
Long-term yields in Germany fell sharply from mid-December
through January as liquid holdings and savings were shifted into longterm securities on a large scale in anticipation of lower rates and a
general relaxation of monetary restraint.
The average yield on public
authority bonds fell from 8.17 per cent in December to 7.68 per cent in
January.
Since January, however, yields have edged upward and are now
near the levels which prevailed at the end of 1970.
the market has become congested with new issues.
In recent months,
Restrictions on floating
new issues were imposed for the month of June, but reportedly the
moratorium is being circumvented by direct placing of medium-term notes.
Short-term interest rates in the Netherlands remained high in
the first quarter, reflecting the tight credit policy being pursued by
the monetary authorities in order to reduce excess demand and inflationary
pressures in the Dutch economy.
On April 5, the Netherlands Bank cut its discount rate from 6
to 5-1/2 per cent, following the reduction in the Bundesbank rate a few
days earlier.
first quarter.
Capital inflows into the Netherlands had been heavy in the
The Dutch monetary authorities welcomed the opportunity
IV - 15
the action of the Bundesbank gave them to reduce the gap between Dutch
and Euro-dollar rates without creating the impression of easing domestic
restraint (as they might have done had the Dutch discount rate been
lowered in the absence of a similar move by the German authorities).
Quantitative limitations on extension of credit were maintained.
After the discount rate reduction, short-term interest rates
(in particular, the rate on call money) fell and since then have for the
most part remained at a low level.
to check capital inflows.
The lowering of interest rates failed
Inflows abated somewhat in April, but resumed
on a large scale when speculative demand for the guilder mounted in early
May.
Since the guilder was floated there has been no further
tightening of monetary restrictions, but there has been no easing; and
with capital inflows no longer augmenting liquidity, interest rates may
well rise in the future.
Long-term yields in the Netherlands have declined about 50
basis points during 1971,
reflecting the large capital inflows before
the guilder was floated.
Short-term interest rates in the United Kingdom held stable or
edged upward during the first quarter, despite the downward movement in
Euro-dollar rates during most of that period, reflecting the government's
effort to maintain tight money.
The widening spread between sterling and Euro-dollar rates in
the first quarter caused heavy short-term capital inflows.
In addition,
IV - 17
the prospects of capital gains -- it was generally assumed that British
interest rates would fall relatively soon -- made longer-term British
assets attractive to foreign investors.
Total net capital inflow
(including errors and omissions) in January-March exceeded $2 billion
and was a major factor in the 13 per cent (seasonally adjusted annual
rate) expansion of the money supply in the first quarter.
Largely to stem the capital inflow, the Bank of England
lowered its discount rate on April 1 by a full percentage point -traditionally, Bank rate decreases have been by half a point only -- from
7 to 6 per cent.
Though the influx of capital was helping Britain reduce
its short-term external debt -- repayments in the first quarter totalled
about $1.6 billion, including almost $700 million to the IMF -- the
authorities feared that a continuing accumulation of external liabilities
based on volatile, interest-sensitive capital could ultimately have
destabilizing consequences for the pound, should the massive inflow
abruptly become a massive outflow.
Furthermore, reducing interest rates
was consistent with the stimulative measures the government announced in
presenting its annual budget to Parliament on March 30.
Short-term interest rates in Britain have fallen since the
beginning of April.
Despite the lower yields on sterling assets and the higher
Euro-dollar rates, demand for sterling has generally remained strong in
the second quarter and there have reportedly been sizable capital inflows
though not as large as in the first three months of the year.
The
IV - 18
announcement at the end of April by the Bundesbank of its withdrawal
from the forward market apparently triggered some purchases of sterling
as well as of marks.
Long-term yields in Britain declined during the first quarter,
despite large-scale selling of government bonds by the Bank of England
which was striving to moderate increases in the money supply and in bond
prices.
Since Bank rate was cut, however, yields on long-term government
bonds have risen somewhat, mainly because of expectation of persisting
inflation and doubt about the long-term outlook for the balance of payments.
Short-term interest rates declined sharply in Belgium in the
first quarter, as was evidenced by the fall in the tap rate on threemonth Treasury bills from 6.95 per cent at the end of December to 4.80
per cent on April 6.
The decrease in yields was partly associated with
the decline in Euro-dollar rates but also reflected the effects of a
large current account surplus.
The National Bank of Belgium encouraged
the downtrend in interest rates by lowering the discount rate from 6.5
to 6 per cent on March 25.
Short-term rates have been stable in the second quarter, as
Euro-dollar rate rises since mid-March have been offset by speculative
demand for the Belgian franc, which has led to further increases in bank
liquidity and official foreign exchange reserves.
Speculation became
particularly intense in May.
Long-term yields also dropped this year -- by about 40 basis
points in the case of bond yields -- but practically all of the decrease
occurred in January and February.
IV - 19
During the first quarter France kept domestic short-term
interest rates in line with Euro-dollar rates by frequent reductions
in the central bank's money market intervention rate.
This tactic,
together with exchange controls, partially insulated France from the
capital inflows and consequent excess liquidity which plagued other
European countries.
Money market rates continued to decline in April but rose
substantially in May, as monetary policy, expansionary in the first
quarter, was tightened.
Commercial bank reserve requirements were
raised twice during the month and the Bank of France discount rate
was raised from 6-1/2 to 6-3/4 per cent on May 13.
The reversal in
monetary policy was motivated by the persistence of the rapid rate of
increase in both wages and prices.
Long-term yields in France fell by about 15 basis points from
January to February.
Since then, they have risen moderately and
currently stand slightly above the January level.
The general downward movement of Italian interest rates,
which began in August 1970, continued through the first four months of
1970.
Declines in interest rates outside Italy reinforced the effects
on the Italian interest rate structure produced by continuing large
increases in the monetary base (currency and other liabilities of the
Bank of Italy).
The buildup in
the monetary base, which began last
autumn, reflects the easier monetary policy that the Bank of Italy
initiated in the fourth quarter and has maintained this year.
The Bank
IV - 20
of Italy cut the rate on advances from 5-1/2 to 5 per cent in January
and reduced its discount rate from 5-1/2 to 5 per cent in early April.
With respect to short-term yields, the rate on time deposits
of 100 million lire or more, which had dropped by two percentage points
in the final four months of 1970, declined from 6 per cent at the end
of December to 4-3/4 per cent at the end of April.
Between December
and April banks lowered their lending rates -- something they had not
done in the closing months of 1970, despite the fall in deposit rates -the prime rate reportedly falling by 100 basis points.
Bond yields plummeted in January and February and then edged
down a little further in March and April.
The decline in yields during
these four months amounted to about 75 basis points.
The drop in yields
from their peak level in July 1970 has been about 150 basis points.
Reflecting the easy monetary policy in force since early 1970,
Canadian short-term yields trended downward through most of last year.
There was a moderate upturn in rates at the end of the year and through
January 1971, followed by an exceptionally sharp decline in February.
Since then rates have remained level despite the rise in short-term rates
in the United States.
The recent unusual negative spread between Canadian and U.S.
3-month rates may have contributed to the recent decline in the exchange
rate of the Canadian dollar, which is expected to bring some relief to
export interests.
Exporters claim to have suffered serious injury as a
result of the appreciation of the Canadian dollar -- from about 93.25
IV - 21
to as high as 100 -- since it was floated on June 1, 1970.
The rate is
now $97.64.
Easy money, with attendant low interest rates, is also part
of a general reflationary policy designed to lift Canada out of a
recession which has been steeper than the one in the United States.
Developments in Canadian bond markets have roughly paralleled
those in the United States in recent months.
Yields declined sharply
in late 1970 and early 1971 but have risen noticeably in recent weeks
in response to increased demands for long-term funds and revived inflationary expectations.
In Japan, interest rates have generally declined since the
Bank of Japan relaxed its tight money policy last summer.
The Bank
lowered its basic discount rate one-quarter of a percentage point three
times -- on October 28, January 20 and May 8 -- and the rate is currently
5-1/2 per cent.
The Bank also eased its ceilings on city bank lending
in the fourth quarter of last year and suspended them altogether in
January 1971.
Loan demand increased during the first quarter of this
year, but it has reportedly slackened since early April.
Call loan rates have declined this year, dropping from 8.0 per
cent at the end of December to 5.5 per cent on June 5.
The yield on long-
term industrial bonds has declined moderately, from 8.69 per cent at the
end of December to 8.14 per cent in March.
The average interest rate on
bank loans has also been declining, but at a slower rate than after
comparable reductions in the official discount rate in the past.
IV - 22
In May, Japan took a series of modest steps to reduce the
excessive rate of accumulation of international reserves.
These measures
included the establishment of ceilings on the borrowings of overseas
Japanese banks and a prohibition against the purchase by foreigners of
unlisted Japanese securities.
IV
U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
-C-1
6/22/71
BILLIONS OF DOLLARS
SHORT-TERM INTEREST RATES (EEC
COUNTRIES)
PERCENT
SHORT-TERM INTEREST RATES(OTHER <OUNTRIES)
EURO-OOLLAR
MAY 716
SHARE OF MANUFACTURES EXPORTS
PERCENT
r
25
W. GERMANY
/
aI 219
SU.S.
or 184
JAPAN
tI
ca 100
i
1969
U S BANK LIABILITIES
INCLUDESEXIM NOTES AND
CERTIFICATES
HELDBY BRANCHES
1
TREASURY
i! I
I
1971
I
U.S. DIRECT INVESTMENT OUTFLOWS (
PERCENT
@FedFRASER