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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) March 11, 1977 CLASS II - FOMC SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS THE DOMESTIC NONFINANCIAL ECONOMY Page Wholesale price index....................................... Retail sales...... ......................... ........ ...... Wholesale trade inventories ................. ................. TABLES: Recent changes in wholesale prices.......................... Retail sales............ ............... ..... .... ........... THE DOMESTIC FINANCIAL ECONOMY New York City.............. ................... ............... TABLE: Interest rates................... .... ............ ... ......... ERRATA Part II............................................ . ... ...... SUPPLEMENTAL NOTES The Domestic Nonfinancial Economy The increase of 0.9 per cent in the wholesale price index in February was nearly double the average monthly rise over the preceding year. The sources of acceleration were farm and food prices, which rose 2.0 per cent in February, and fuels and power, which rose 3.3 per cent. In contrast, posted prices of industrial commodities other than fuels and power rose only 0.2 per cent in February. Higher prices were widespread in the farm and food group with live poultry, fresh fruits and vegetables, grains, coffee, cocoa, soybeans, and manufactured animal feeds being especially important in the large rise. Increases for fresh fruits and vegetables were directly related to the effects of the severe weather, while several others, such as grains and cotton, were, in part, affected by current and prospective drought conditions. had helped damp Prior to February, farm and food prices price pressure, having risen only 0.1 per cent over the year ending in January. A sharp increase in the price for natural gas (which enters the index with a two-month lag) reflected the termination of rebates which gas companies have been giving customers because of a misinter- pretation of FPC rules. Crude petroleum, refined petroleum products, and electric power also posted substantial increases. Over the year ending in February, the index for fuels and power showed a 13 per cent increase, with natural gas and related products up nearly 50 per cent. -2 - Among the other industrial commodity groups, price increases were generally more moderate than in recent months. Steel and machinery price indices which had each risen 0.9 per cent in January, rose 0.1 and 0.3 per cent, respectively, in February. The decline in lumber and wood product prices in February may have been partly due to less-thanseasonal demand as severe weather curtailed construction activity. RECENT CHANGES IN WHOLESALE PRICES (Per cent changes at annual rates; based on seasonally adjusted data) Relative impor- Dec. 74 Dec. 75 Dec. 75 June 76 Dec. 76 Jan. 77 tance to to to to to to Dec. 76 Dec. 75 Dec. 76 June 761Dec. 76 Jan. 77 Feb, 77 All commodities 100.0 4.2 4.7 3.9 5.3 5.8 10.8 Farm and food products 21.6 -.3 -1.1 1.0 -3.3 3.9 24.1 Industrial commodities Excluding fuels and related products and power Materials, crude andI intermediate 2/ 78.4 6.0 6.4 4.8 8.0 5.7 7.6 67.7 5.0 6.1 5.6 6.6 8.1 49.1 5.4 6.7 5.4 8.1 4.8 18.7 12.1 6.7 8.2 4.8 6.5 3.1 5.8 6.7 7.1 11,6 4.7 10.4 5.5 -2.5 Finished goods Consumer nonfoods Producer goods Memo: Consumer foods 1/ 2/ Not compounded for one-month changes, Estimated series. -1.2 -3.2 -1.3 23.9 - 3 - Retail sales increased 1.8 per cent from the downward revised January level, according to the advance estimate, Spending at most major types of stores was higher but the largest gains were among durable goods. Sales of the automotive group advanced 3.2 per cent and outlays for furniture and appliances rose 2.2 per cent. Excluding autos and some nonconsumption items, sales in February were 1.1 per cent above January. The final sample count increased the December level more than $150 million on a seasonally adjusted basis. This is a large change for the third count, and it increases the gain in sales in the final month to 4.2 per cent from 3.9 per cent. RETAIL SALES (Per cent change from previous period; based on seasonally adjusted data) 1976 IV 1977 Nov. Dec. Jan. 3.5 1.7 4.2 -2.3 1.8 .0 3.3 1.5 3.8 -3.1 n.a. 1.3 1.7 3.2 .9 2.0 -1.7 1.1 -.2 2.9 4.3 .8 1.5 -3.2 1.0 3.4 4.5 .2 -.7 3.9 4.3 3.4 4.0 8.7 14.4 -4.0 -3.5 3.2 4.2 2.7 -.2 4.1 3.0 .2 -5,8 2.2 1.2 -3.4 1.2 -.1 .0 1.7 5.7 1.0 3.1 2.3 3.3 1.8 2.3 5.1 4.8 .9 -1.1 -.2 .8 1.3 2.0 2.3 2.5 1.6 3.8 -1.4 -2.9 -3.1 1.1 II III Total sales 1.9 1.2 (Real*) 1.0 Feb. 1/ Total, less auto and nonconsumption items GAF Durable Auto Furniture and appliances Nondurable Apparel Food General merchandise Gasoline * Deflated by all commodities SA consumer price index. 1/ Advance estimate. -2.6 .0 -.1 1.5 1.0 ,0 -4- Book value of wholesale trade inventories rose at a $7.6 billion annual rate in January, following a drop at a $0.4 billion annual rate in December, and a $1.6 billion fourth quarter average annual rate of rise. Durable stocks increased at a $5.4 billion annual rate in January following a $3.5 billion December rate of fall. In contrast, nondurable stocks rose slightly slower in January than in December. While these figures show a large turnaround of durable wholesale inventory investment in January, distribution of inventory investment between wholesale and retail trade is volatile, and thus this turnaround may not be a good predictor for all trade inventories. The Domestic Financial Economy New York City. Since November 19 when New York State's highest court declared the Debt Moratorium Act unconstitutional, the City has been negotiating with the Clearinghouse banks and the municipal unions on ways to repay the $1 billion of notes formerly covered by the Act. Until very recently the discussions centered around the extension of maturities on MAC debt held by the banks and the pension funds ($200 million), the sale of City-owned mortgages ($200-$250 million), and the public sale of City and/or MAC securities ($500 million or more). The banks made their participation in such a plan conditional on the City adopting certain budgetary and financial procedures as well as accepting some sort of oversight body with powers to enforce a balanced City budget. - 5 - Negotiations between the banks and the City broke down on Friday, March 4, following the submission of the latest bank proposal for an oversight body. The Mayor immediately rejected the plan and began exploring other ways of raising the needed $1 billion. Over the weekend, City officials developed an alternative plan that would not require the participation of the banks. The basic elements are: (1) an expanded sale of City-owned mortgages ($410 million), (2) an extension of maturities on MAC and certain City debt held by the City pension funds ($130 million), and (3) a sale of MAC securities to institutional holders of City notes and to the public, if necessary ($267 million), and (4) cash from a variety of sources ($176 million). This plan was accepted by the Emergency Financial Control Board and it is expected that the Treasury also will approve it. Treasury's approval is necessary if the City is to draw $255 million on its seasonal financing line with the Federal government. These funds are necessary to meet debt service payments scheduled for March 14 and 15. ERRATA - Part - II Table IV - T - 1 U.S. International Transactions column 1 should read 1976 column 6 should read 1977 Page III-15, line 6: change "month", to "two months", -6INTEREST RATES (One day quotes--in per cent) 1976 Highs 1977 Lows Feb. 14 Mar. 10 Short-Term Rates Federal funds (wkly. avg.) 3-month Treasury bills (bid) Comm. paper (90-119 days) Bankers' acceptances Euro-dollars CD's (NYC) 90 days Most often quoted new 6-month Treasury bills (bid) Comm. paper (4-6 mos.) Federal agencies CD's (NYC) 180 days Most often quoted new 1-year Treasury bills (bid) Federal agencies CD's (NYC) Most often quotd new Prime municipals 5.58(6/30) 4.63(12/22) 4.70(2/16) 4.63(3/9) 5.57(6/2) 6.00(6/15) 5.95(6/2) 6.81(6/1) 4.24(12/20) 4.63(12/31) 4.58(12/20) 4.81(12/8) 4.63 4.75 4.79 5.06 4.62 4.75 4.85 5.13 5.75(6/16) 4.50(12/29) 4.75(2/9) 4.77(3/9) 5.96(5/27) 6.00(6/22) 6.42(5/27) 4.47(12/23) 4.63(12/31) 4.72(12/22) 4.86 4.88 4.91 4.88 n.a. n.a. 6.50(6/2) 4.60(12/29) 5.00(2/9) 5.00(3/9) 6.39(5/27) 6.86(5/28) 4.59(12/27) 5.00(12/27) 5.11 5.22 n.a. n.a. 6.75(6/16) 3.70(5/28) 4.80(12/15) 2.50(12/31) 5.25(2/9) 2.85(2/11) 5.25(3/9) 2.90(3/11) 7.59(5/27) 7.93(5/21) 8.20(5/21) 5.59(12/10) 6.27(12/10) 7.17(12/31) 6.38 7.16 7.64 6.49 7.22 7.76 8.66(1/2) 10.34(1/2) 8.95(5/28) 8.94(1/7) 7.97(12/20) 9.08(12/17) 7.93(12/10) 7.84(12/31) 8.04 9.09 8.15(2/4) 8.12(2/11) 8.12(3/9) 9.16(3/9) 8.30 8.28 7.13(1/3) 5.83(12/30) 5.86(2/10) 5.92 9.20(6/1) 8.39(12/27) 8.52(2/7) 8.66(3/7) Intermediate- and Long-Term Treasury (constant maturity) 3-year 7-year 20-year Corporate Seasoned Aaa Baa Aaa Utility New Issue Recently Offered Municipal Bond Buyer Index Mortgage--average yield in FNMA auction
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