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Confidential (FR) Class II FOMC

March 12, 1980

RECENT DEVELOPMENTS

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS
Employment and production
. . . . . .
Personal income and consumer spending
Residential construction . .
. . .
Business fixed investment
. . . . . .
Inventory investment
. . .
.
Federal government sector . . . .
State and local government spending
Prices . . . . . . . . . . . . . . .
Wages
. . . . . . . . . . . . . . . .

TABLES
Changes in employment . . . . . .
Selected unemployment rates . . .
Personal income . . . . . . . . .
Retail sales . . .
. . . ....
Auto sales
. . . . . . . . . . .
New private housing activity . . .
Components of current dollar
business investment spending ..
Business inventories . . . . . . .
Dealer stocks of automobiles . . .
Recent changes in producer prices
Recent changes in consumer prices
Hourly earnings index . . . . . .
Employment cost index . . . . . .

CHARTS:
Sales and inventories of new single-family houses
Capital spending commitments

. .

.. . . .

Manufacturers' newly approved capital appropriations .
Appendix A:

Defense-related manufacturing activity

Page

TABLE OF CONTENTS

(cont.)

Page

Section

III

DOMESTIC FINANCIAL DEVELOPMENTS
Monetary aggregates and bank
Business finance . . ..
..
Government debt markets . .
Mortgage markets . . . . . .
Consumer credit . . . . . .

credit . . .
. . ..
. . . . .
. . .
. ..
.

.
.
.
.

*
.
.
.

.
.
a

.
..

.
.
.
.

@@@@@'@
.
.

'@@
"@@@@@"
''@@'@

TABLES:
Selected financial market quotations . .
. . . . . . .
Monetary aggregates
. . . . . . .
. . . . . . .
Market shares of variable ceiling accounts .. . .
Commercial bank credit and short- and intermediate-term
business credit
. . . .. .
. . . . . .
Gross offerings of corporate and foreign securities . .
Public offerings of notes and bonds by nonfinancial
corporations
. . .
..
. .
. .. .
.
Government security offerings
. . . . . . . . . . .
.
Interest rates and supply of mortgage funds
at selected savings and loans . . . .
.
. . . .
Secondary home mortgage market activity . . . . . .
Consumer installment credit . . . . .
. . . . . . . .

CHARTS:
. . .
Liquidity measures for nonfinancial corporations . . . . .
. . . .
S . .
Profitability of thrift institutions
.
. .
..
Rate of growth in auto and non-auto consumer
.
installment credit . .
S . . . . .
. . .. . . ..
. ..

12
18
20

APPENDIX B
Weekend reserve-avoidance activity . .

. . . . . . . B-l

. . .

INTERNATIONAL DEVELOPMENTS
. ..
Foreign exchange markets . . . .
Borrowing in international capital markets
.. . . .
U.S. international transactions
Foreign economic developments
. . . .
Individual country notes
. . . .
..

.
.
.
..
. .

.
.
.
.

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

.
. .
. .
. . .

1
5
8
13
17

TABLE OF CONTENTS (cont.)

Page

Section
INTERNATIONAL DEVELOPMENTS
TABLES:
Borrowing in international capital markets . .
U.S. international transactions
.
.. .
Consumer and wholesale prices in major
industrial countries
. . . . . . . ..
Real GNP and industrial production in
major industrial countries . . . . . ..
Trade and current-account balances of
major industrial countries
. . . .
.

CHARTS:
Weighted-average exchange value of the U.S. dollar . . .

. . . .

II - T - 1

March 12,

1980

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest Data

Period

Release
Date

Data

Percent Change from
Three
Preceding
Periods
Year
Period
Earlier
earlier

(At annual rate)

Nonfarm employment,

3-7-80
3-7-80
3-7-80
3-7-80
3-7-80
3-7-80
3-7-80

Feb.
Jan.

3-7-80
2-29-80

Jan.
Jan.

payroll (mil.)

Manufacturing
Nonmanufacturing
Private
nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($) 1/
Manufacturing:
Average weekly hours (hr.) 1/
Unit labor cost (1967=100)

Feb.
Feb.
Feb.
Feb.
Feb.
Feb.

Feb.
Feb.

Civilian labor force
Uneployment race (%) 1/
Insured unemployment raTe (%) 1/

3-7-80

104.3
6.0
3.1
90.7
20.9
69.8

35.6
6.42

35.7
6.33

35.7
6.00

40.1
182.4

40.3
4.6

40.1
9.0

40.6
6.9

152.7
148.4
176.3
95.2
156.6

3.2
-4.0
12.4
2.5
3.8

1.1

Jan.
Jan.
Jan.

2-15-80
2-15-80
2-15-80
2-15-80
2-L5-40
2-15-80

5.1
.8

.8
-1.5
4.9
3.0
1.0

Consumer prices all items (1967=100) Jan.
All items, excluding food & energy Jan.
Jan.
Food

2-22-80
2-22-80
2-22-80

233.8
221.0
244.8

16.7

16.0
.0

14.7
14.6
8.3

13.8
12.0
8.7

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood
Crude foodatuffs & feedstuffs

Feb.
Feb.
Feb.

3-7-80
3-7-80
3-7-80

235.3
274.2
251.3

17.6
20.5
25.9

16.1
24.1
-6.0

13.5
19.3
4.0

Personal income ($ bil.) 2/

Jan.

2-19-80

11.0

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

35.4
6.45

6.2
3.2
1.9
1.0
2.1

2035.6

6.8

-3. ;
10 .t

(Not at annual rates)
Mfrs. new orders dur. goods ($ bil.) Jan.
Capital goods industries
Jan.
Jan.
Nondefense
Jan.
Defense

3-4-80
3-4-80
3-4-80
3-4-80

81.5
26.8
23.2
3.6

4.8
.6
1.6
-5.2

6.3
11.6
10.6
18.9

2.3
10.8
8.5
28.8

Inventories to sales ratio: 1
Manufacturing and trade, total
Manufacturing
Trade

3-4-80
3-4-80
3-4-80

1.41
1.53
1.27

1.42
1.56
1.28

1.41
1.54
1.28

1.39
1.49
1.31

3-4-80

.567

.566

.561

Feb.
Feb.

3-10-80
3-10-80

79.0
16.7

-. 7
-1.0

Feb.
Feb.
Feb.

3-5-80
3-5-80
3-5-80

10.5
7.7
2.9

-6.9
-7.8
-4.4

1980
1979-94
1980-01
1980-Q2

3-12-80
3-12-80
3-12-80
3-12-80

196.78
186.95
189.49
193.83

1979-Q4
Jan..
Jan.

3-11-80
2-19-80
2-29-80

24,517
1,420
135.1

Ratio:

Dec.
Jan.
Dec.

Mfrs.' durable goods inventories to unfilled orders 1/ Jan.

Retail sales, total ($ bil.)
GAF 3/
Auto sales, total (mil.
Domestic models
Foreign models
Plant & Equipmer
All Industries

units.) 2/

11.7
8.9
20.1

11.1
11.8
-7.3
-16.4
31.0

expen. ($ bil.) 4/

Capital Appropriations, Mfg.
Housing starts, private (thous.)
Leading indicators (1967=100)
1/
2/
7/
4/

3.3
.1

Actual data used in Lieu of percent changes for earlier oeriods.
At annual rate.
Excludes aail order houses.
Planned-Comerce March 1980 Survey.

11.1
14.0

14.2
11.7
-17.0
-2.7

30.8
-17.8
-5.3

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity apparently continued to expand in early 1980,
as labor demand held firm and industrial production edged higher; a major
exception was housing which declined further.

In spite of weak income

growth and continuing consumer pessimism, retail sales moved up strongly
in January before declining in February.

In addition, indicators of

business spending continued to show strength.

At the same time, prices

at both the producer and the consumer levels accelerated further in early
1980.
Employment and Production
Labor demand was relatively well maintained in February.

Non-

farm payroll employment rose 140,000 following an exceptionally large
advance during the previous month.

As in other recent months, hiring

gains during February were concentrated in the trade and service sectors.
Manufacturing employment showed little change as an increase at transportation equipment producers associated with some recovery of auto
production was offset by a strike-related reduction in the petroleum
industry.

The factory workweek declined 0.2 hour to 40.1 hours.
Total employment, as measured by the household survey, also

rose moderately in February.

The jobless rate, which had increased in

January, dropped 0.2 percent to 6 percent.

No significant changes in

the composition of unemployment were apparent in the February data.
Industrial production advanced 0.3 percent in January and is
expected to show a similar increase for February.

The continued rise

anticipated for February was due mainly to a sharp increase in the output of automobiles, trucks, and parts from very low January levels.
II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)

1978
H1

1979
Q3

1980
Jan. Feb.

- - - Average monthly changes -

Nonfarm payroll employment 2
Strike adjusted

334
318

249
254

59
62

146
158

349
292

141
202

69
57
12
39
169

30
30
1
32
132

-38
-8
-30
3
77

-23
-41
-18
.37
103

1
-15
16
110
227

18
59
-41
-32
172

Private nonfarm production workers
Manufacturing production workers

256
50

171
13

11
-46

104
-31

210
-41

169
38

Total employment 3
Nonagricultural

270
264

137
159

284
244

136
138

-108
-19

149
92

Manufacturing
Durable
Nondurable
Construction
Trade, finance and services

1. Changes are from final month of preceding period to final month of
period indicated.
2. Survey of establishments. Not strike adjusted, except where noted.
3. Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1978
H1
Total, 16 years and older

1979
Q3

1980
Jan. Feb.

6.0

5.8

5.9

6.2

6.0

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

16.3
9.5
3.4
5.1

16.0
8.8
3.2
4.9

16.2
9.2
3.3
4.7

16.1
9.4
3.4
4.8

16.3
10.1
3.7
4.9

16.5
9.5
3.6
4.9

White
Black and other

5.2
11.9

5.0
11.5

5.1
10.9

5.1
11.2

5.4
11.8

5.3
11.5

Fulltime workers

5.5

5.2

5.3

5.4

5.7

5.6

White collar
Blue collar

3.5
6.8

3.3
6.7

3.4
7.1

3.3
7.3

3.4
8.0

3.4
7.7

II-3

Outside the motor vehicle industry, little change appears to have
occurred in most components of the index.

Capacity utilization rates

remained essentially unchanged during the first two months of the year
from their reduced year-end levels.
Personal Income and Consumer Spending
Growth in total personal income slowed in January to about
half the average monthly gain observed in the fourth quarter of 1979.
Gains in wages and salaries were smaller than in previous months, reflecting moderate wage increases in January.
income was estimated to have declined.

In addition, farm proprietors'
However, income growth in January

was augmented by the payment of a special energy allowance ($4-1/2
billion at an annual rate), a factor which was only partially offset by
a stepup

in the taxable wage base for social security contributions

(as measured in the national income accounts).

The increase in dis-

posable personal income reported for January was somewhat larger than
the advances registered in recent months, but more than half of this
increase represented the treatment in the income and product accounts
of the payment of extraordinarily large tax refunds expected to be
distributed this spring.
Despite the slower real income growth over the past year,
consumer expenditures generally have continued to show strength.

Unit

auto sales receded somewhat in February from the rapid rate posted in
January, but at a 10.6 million unit annual rate they remained appreciably above the fourth-quarter level.

In February, customers received

rebates on the purchase of a number of domestic models.

Promotional

advertising was strong, and the availability of some of the more popular

II-4

PERSONAL INCOME
(Based on seasonally adjusted annual rate data)

1978

1979

1979
Nov.

Dec.

1980
Jan.

- - Percentage change, at annual rates1 Total personal income
Wage and salary
disbursements
Private

12.9

11.1

12.1

13.8

12.1

6.8

12.8
14.0

10.1
10.8

10.9
11.1

13.3
15.0

10.7
12.5

5.7
5.0

Nominal disposable personal
income
Real disposable personal
income

12.0

10.2

10.4

4.2

-11.9

10.5

3.6

14.1

n.a.

2
- - Changes in billions of dollars - -

Total personal income
Wage and salary disbursements
Private
Manufacturing
Other income
Transfer payments
Less: Personal contributions
for social insurance
Memorandum:
Personal savings rate 3

$17.8

$16.5

$21.4

$22.8

$20.2

11.5
10.1
3.2

9.6
8.4
2.0

11.6
9.7
2.7

13.9
12.7
1.5

11.3
10.7
4.0

7.1
1.5

7.7

10.4

9.7

9.5

8.3

2.9

2.0

1.1

2.7

6.2

4.9

4.5

3.4

3.2

$11.4
6.1
4.3
2.2

3.0

n.a.

1. Changes over periods longer than one quarter are measured from final
quarter of preceding period to final quarter of period indicated. Changes
for quarterly period are compounded rates of changes.
2. Average monthly change.
3. Equals the centered three-month moving average of personal savings as
a percentage of the centered three-month moving average of disposable
personal income.

II-5

fuel-efficient domestic models also improved.

Import sales--at 2.9

million units--were off slightly from the record January rate, possibly
because of reemerging inventory shortages for some models.
Nominal retail sales excluding auto outlets and stores selling
mainly nonconsumer items declined 0.5 percent in February, following an
upward revised increase of 2.5 percent in January.
off was fairly

The February drop-

widespread, with sales at most major types of stores

down from their January levels.

Nominal outlays at gasoline stations

continued to move up, reflecting sharply higher prices of fuel.
Surveys of consumer attitudes conducted in February continued
to indicate the pessimistic mood generally evident since last spring.
The Conference Board reported the third month-to-month decline in their
composite index of confidence, with more consumers expressing concern
about present economic conditions and employment opportunities.

However,

the Michigan survey for February indicated that attitudes toward buying
conditions for cars had improved considerably.

Respondents were clearly

aware of the new car rebates and dealer incentive programs and answered
in a follow-up question that "prices are lower" and "some good buys are
available."
Residential Construction
New housing activity weakened further in January, with total
private housing starts off an additional 6 percent from the December
pace.

This decline occurred in spite of weather conditions that generally

were more favorable for building than in recent winters.

Since the third

quarter of 1979, starts have fallen more than 20 percent and permits have
declined nearly 25 percent.

II-6

RETAIL SALES
(Percentage change from previous period;
(Percentage
based on seasonally adjusted data)
1979

1.9

Total sales
(Real)1

1980
Feb.
Jan.

1979
Dec.

4.2

2.2

3.3

-.7

-1.0

-2.1

2.2

-.2

1.9

n.a.

Total, less auto and
nonconsumption items

1.7

2.4

4.1

3.5

2.5

-.5

GAF 2

-.4

2.4

5.3

1.1

-2.2-

3.5

-1.0

1.6
3.6
1.7

-2.7
-7.1
2.3

5.1
3.9
8.1

-1.2
-2.2
-1.8

1.9
1.9
-.2

5.0
7.0
5.4

-1.1
-.2
-.6

3.7
5.8
1.9
4.0
7.4

4.0
-1.3
3.5
3.1
8.4

.2
-.8
1.8
-3.6
.3

2.5
5.2
.8
2.1
5.4

-.5
-2.0
-. 8
-.8
2.6

Durable
Auto
Furniture & appliances
Nondurable
Apparel
Food
General merchandise 3
Gasoline

2.1
-1.1
3.5
-1.0
4.4

2.3
.8
2.5
3.1
7.2

1. BCD series 59.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales
are also excluded in the GAF composite sales summary.

(Millions of units;

AUTO SALES
seasonally adjusted annual rates)

Nov.

Dec.

1980
Feb.
Jan.

9.8

9.4

10.6

11.3

10.5.

2.2

2.4

2.6

3.0

2.9

8.1

8.6

7.4

7.0

8.0

8.3

7.7

3.9

3.6

3.5

3.3

3.8

3.7

5.4

4.1

4.9

4.0

3.8

4.2

4.6

4.0

1979
Q1

11.6

10.7

10.8

Foreign-made

2.3

2.5

U.S.-made

9.3

Small
Intermediate
& standard

Total

Note:

Components may not add to totals due to rounding.

II-7

NEW PRIVATE HOUSING ACTIVITY

(Seasonally adjusted annual rates, millions of units)

Nov.

Dec.

1980
Jan.1

1.35
1.58

1.26
1.52

1.24
1.52

1.27
1.42

1.02
1.23.

.82
1.05

.75
.98

.78
-1.04

.77
1.00

.71
3.73

.74
3.81

.61
3.56

.59
3.45

.57
3.35

.59
3.21

.56
.56

.64
.58

.53
.53

.51
.54

.46
.48

.50
.42

.26

.25

.24

n.a.

Annual
All units
Permits
Starts

1.54
1.74

1.59
1.82

1.65
1.81

0.97
1.19

1.03
1.26

.71
3.74

.57
.55

1979
Q4

Single-family units
Permits
Starts

Sales
New homes
Existing homes
Multifamily units
Permits
Starts
Mobile home shipments

1. Preliminary estimates.
n.a.--not available.

II-8

SALES AND INVENTORIES OF NEW SINGLE-FAMILY HOUSES
(Seasonally adjusted)
Units (1000)
S900
)79:Q4
N

New Homes

613
594

570

)80:J

Sold (AR)
800

594

700

600

1979: Q4
N
D
1980: J
-""-

SI
-"--

403
401
401
400
" *..
"

400
0

For sale

(End of quarter)

300

Months
12

Months'

Supply

1979:Q4

8.2

N
D

7.9

8.8

1960:J

8.3
P.
1

I
1972

1974

1976

I
1978

Data plotted quarterly through 1979-Q3, monthly thereafter.

II-9

The recent decline in activity has occurred in both multifamily
and single-family units.

In the multifamily sector, housing starts fell

12 percent in January (seasonally adjusted) to a three-year low.

While

starts of HUD-subsidized units (Section 8) have been relatively weak
over the past two months, the bulk of the recent decline in multifamily
starts has been in nonsubsidized units, reflecting in part the sharply
increased costs associated with higher interest rates.

Activity in the

single family sector also has weakened considerably in recent months,
with starts in January almost 17 percent lower than the 1979 average.
Single family starts have declined substantially in all regions except
the South, which continues to experience strong immigration.
New home sales rose 4 percent in January, but were still more
than 20 percent below the pace last July.

The reduced pace of construc-

tion in recent months has helped keep the stock of unsold units from
escalating as it did prior to and during the 1973 sales slump.

Never-

theless, the large reductions in sales last fall left builders with
about 8 months' supply of unsold units at the end of January--well
above the level one year ago.

Existing home sales fell 4 percent in

January; however, they remained about 50 percent higher than the rate
experienced during the 1973 downturn in sales.
Business Fixed Investment
Business investment activity continued at a high rate during
January, with most indicators showing substantial gains.

Shipments of

nondefense capital goods rose 3-1/2 percent--about the same as in
December.

Some of this rise, however, may have been due to an increase

in the magnitude of the seasonal adjustment resulting from three years

II-10

COMPONENTS OF CURRENT DOLLAR
BUSINESS INVESTMENT SPENDING
(Percentage change from preceding comparable period,
based on seasonally adjusted data in current dollars)

Nov.

Dec.

Jan.

Jan. 1979
to
Jan. 1980

Nondefense capital goods
shipments

-.6

5.4

0.8

-2.5

3.2

3.5

12.3

Nonresidential construction
put-in-place

8.0

4.8

5.5

0.1

3.9

0.0

24.5

10.9

5.1

7.0

0.3

5.3

3.7

38.2

4.3

4.4

3.6

-0.1

2.0

-5.1

8.3

1980

1979

Building
Nonbuilding

II-11

CAPITAL SPENDING COMMITMENTS

Seasonally adjusted
Billions of S1972
dollars- Ratio Scale

NEW ORDERS NONDEFENSE CAPITAL GOODS

S16

Total

Machinery

10
1977

1978

FACTURERS'

1979

1980
Quarterly r
*ate,
Billions of
1972 dollar s

NEWLY APPROVED CAPITAL

2
1973

1974

1975

1976

1977

1978

1979

1980

II-12

of relatively severe weather.
appears to have increased.

Business spending on motor vehicles also

The value of nonresidential construction put-

in-place was unchanged in January, but remained 2-1/2 percent above the
fourth quarter average.
Data for capital spending commitments suggest that investment
will be well maintained in the near term.

New orders for nondefense

capital goods rose 1-1/2 percent in January,and bookings for nondefense
machinery--usually considered a better guide to short-run underlying
equipment demand--advanced 7 percent.

Moreover, newly approved capital

appropriations of large manufacturers, net of cancellations, rose 10 percent in the fourth quarter of 1979; excluding the volatile petroleum
industry this indicator increased nearly 13 percent.
Indications from the commitments data for the last several
months are broadly consistent with the latest Commerce survey of plant
and equipment spending, taken in late January and February.

The survey

reports that business is planning to increase spending by 11.1 percent
in 1980--virtually the same anticipation as that reported in the December
Commerce survey.

This planned increase in nominal spending suggests

little change in real outlays in 1980, compared with an increase of
about 7 percent in 1979.
Inventory Investment
Inventory investment in manufacturing picked up sharply in January, according to the most recently available data.

The book value

of these inventories rose at a record $50 billion annual rate following
an advance of about $26 billion (annual rate) in the fourth quarter of
last year; the largest increases were reported by producers of chemicals,
nonelectrical machinery, and aircraft, missiles, and parts.

Despite

II-13
BUSINESS INVENTORIES
(Billions of dollars; annual rate of change
in seasonally adjusted book values)

1979

1978
H1

Dec.

41.5

52.7

45.5

35.0

20.2

Manufacturing
Durable
Nondurable

18.1
13.7
4.4

32.6
25.0
7.7

28.3
16.9
11.4

25.8
21.8
4.0

20.4
12.5
7.8

Trade, total
Wholesale
Retail

23.5
12.8
10.7

20.1
9.0
11.1

17.2
12.6
4.6

9.2
6.9
2.3

-. 2
13.9"
-14.1-

Manufacturing and trade

1980
Jan.
n.a.
50.1
28.6
21.5
n.a.
n.a.
n.a.

DEALER STOCKS OF AUTOMOBILES
(Millions of units; seasonally adjusted,
end of period)
1980
Feb.
Jan.

1979
Q3

1.81
.46
.56
.54
.25

2.00
.70
.64
.52
.14

1.86
.54
.54
.57
.22

1.79
.55
.61
.36
.27

1.56
.41
.51
.38
.25

1.53
n.a.
n.a.
n.a.
n.a.

.70

.43

.42

.49

.41

n.a.

1978
Total U.S.-made1
Standard
Intermediate
Compact
Sub-compact
Foreign-made

1. Includes U.S.-made Volkswagens.
n.a. - not available

II-14

this large rise in inventories the stock-sales ratio for manufacturers
declined from 1.56 in December to 1.53 in January, as sales advanced
sharply.
Auto inventories at dealers contracted somewhat further in
February following the substantial quarter-million unit reduction in
January.

Dealer stocks of all U.S.-made automobiles declined 30,000

units as domestic auto sales remained somewhat above assemblies in
February.

Although stocks of most models have been brought back into

line with sales, excess inventories still persist for certain models.
Federal Government Sector
The federal government's budget deficit for the month of
January (not seasonally adjusted) was $4.6 billion, up from the $2.5
billion monthly level recorded a year earlier.

Total spending was

again above administration expectations, with most of the overrun
occurring in the health, highway, interest, and income security areas.
In addition, defense expenditures through the first four months of the
current fiscal year continue to run above earlier agency expectations.
Since the recent surge in spending has resulted in a breach of the
$548 billion spending ceiling contained in the Second Concurrent Budget
Resolution, the Congress cannot even debate any bill that would increase
spending during this fiscal year until a third resolution is adopted.
On the revenue side of the budget, net federal tax receipts
for January and February increased more than anticipated, mainly because
of continued strength in withheld taxes and some initial delays this
year in the processing of individual tax refunds.

Available IRS data

show that the average refund is almost 20 percent larger than a year

II-15

earlier; this is consistent with the administration's projection that
individual refunds during the first half of 1980 will be $43 billion,
up $11 billion from the level registered last year.

In view of the

recent strength in receipts and the prospect for higher rates of inflation, the administration is expected to revise upward its initial fiscal
year 1981 revenue projection of $600 billion.
A joint House-Senate conference committee has agreed on a bill
imposing a "windfall" tax on the additional revenues that are expected
to result from the phased decontrol of crude oil prices.

The conference

committee staff estimates that this "windfall" excise, effective March 1,
will increase net receipts by $3.1 billion in fiscal year 1980 and $12.9
billion in 1981; over the 1980-1990 period, net revenues are expected to
be augmented by $222.6 billion.

The conferees included nonbinding guide-

lines in the bill specifying that the net revenues should be allocated
as follows:

25 percent for aid to low-income households, 60 percent to

income tax reductions, and 15 percent to energy and transportation
programs.
State and Local Government Spending
In the state and local sector, spending was little changed in
early 1980 from the fourth quarter rate as reduced payrolls were offset
by higher construction expenditures.

Employment in state and local

governments moved down during the first two months of the year reflecting further cutbacks in public service jobs.

Employment under the

CETA program fell for the fifth consecutive month and now stands nearly
170,000 below the level at the beginning of fiscal year 1980.

II-16

Construction activity was unseasonably strong in January, in
response to milder than average weather conditions in most regions of
the country.

Preliminary data indicate that the value of new construc-

tion put-in-place increased 9 percent during the month, following two
In real terms, the January increase was one

months of sluggishness.
of the largest on record.

The recent outlays continued to be concen-

trated in road work and in water and sewer projects.
Prices
Aggregate price measures accelerated in the beginning of 1980,
in spite of a marked slowdown in food prices.

In January, consumer

prices rose 1.4 percent, a rate sharply higher than the average monthly
increase experienced during 1979.

Producer prices of finished goods

rose 1.5 percent in February following a 1.6 percent jump in January;
these rates of increase were also substantially above the average 1979
pace.

Price increases were widespread across nonfood categories at

both the producer and consumer levels, with the largest increases associated with rising prices for energy items and metals.
Food prices were unchanged at the retail level during January,
and producer prices for finished foods declined in February for the
second month in a row.

Abundant supplies of fresh produce, bolstered

by favorable weather conditions, were a key factor in reducing overall
food price pressures early this year.
In contrast to food prices, prices of energy goods rose very
sharply in January, as recent petroleum price hikes began showing up
at retail.

Gasoline prices, as measured in the CPI, reached an average

level of $1.11 per gallon in January, and another sizable increase

II-17
RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1
Relative

1979

importance 2

1980

Dec. 1979

1978

1979

Jan.

Feb.

100.0
24.3
47.4
10.3
37.0
28.4

9.2
11.9
8.4
8.0
8.5
8.0

12.5
7.5
17.8
62.7
9.3
8.7

12.9
8.3
17.3
45.6
10.5
9.4

18.9
-9.7
33.6
52.8
28.4
19.8

17.6
-5.7
34.7
89.4
18.5
8.4

Intermediate materials 3
Exc. food and energy

94.9
81.3

8.3
8.9

16.3
12.8

16.5
13.1

36.2
33.0

20.5
13.7

Crude food materials
Crude nonfood
Exc. energy

55.4
44.6
16.0

18.3
15.6
21.0

11.1
26.6
13.1

5.7
30.0
20.1

-46.0
33.2
28.5

25.9
38.3
53.0

Finished goods
Consumer foods
Consumer nonfood
Energy
Exc. energy
Capital equipment

1. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
2. Relative importance weights are on a stage of processing basis.
3. Excludes intermediate materials for manufacturing food and animal
feed.

RECENT CHANGES IN CONSUMER PRICES 1
(Percentage change at annual rates; based on seasonally adjusted data) 2
Relative
importance
Dec. 1979
All items
Food
Energy 3
All items less food
and energy 3
Commodities
Services
Memoranda:
Gasoline
Homeownership

1978

1979

Nov.

Dec.

100.0
17.7
10.3

9.0
11.8
8.0

13.3
10.2
37.4

12.2
8.0
11.0

14.7
16.9
27.2

16.7
0.0
55.5

72.0
34.5
40.9

8.5
7.6
9.3

11.3
8.8
13.7

13.5
11.4
12.8

13.9
11.3
16.6

16.0
14.3
16.4

5.6
24.9

8.5
12.4

52.2
19.8

22.2
24.3

31.2
22.2

88.6
22.6

1979

1980
Jan.

1. Based on index for all urban consumers.
2. Changes are from final month of preceding period to final month of
period indicated. Changes for other than monthly and yearly periods are
compounded.
gasoline and motor oil, fuel oil and coal, gas and
3. Energy items:
electricity.

II-18

apparently occurred in February.

Energy items and a broad group of

petroleum-based products were also a major factor in the acceleration
of producer prices at all stages of processing.
Outside the food and energy categories, there has been a marked

pickup

in inflation rates during the past few months.

Large price

increases were posted in January for new and used cars, medical services,
apparel, cigarettes, and public transportation.

The rapid advance in

producer prices excluding food and energy items was directly related to

higher prices for metals and the pass-through of higher energy costs.
In the CPI, homeownership costs registered a fourth consecutive monthly
rise of about 2 percent.
Wages
Wage rates for nonfarm production workers, as measured by the
index of average hourly earnings, increased 0.8 percent in February to
a level about 8 percent above a year ago.

Manufacturing wages rose

somewhat faster in February than the average and now stand nearly 9 percent above a year earlier.

Wage gains for workers included in the

hourly earnings index have shown no significant trend over the past two
years; however, the Employment Cost Index, which covers a broader group
of nonfarm workers, indicated some acceleration in wages during 1979.
According to this measure, pay rates rose 8-3/4 percent over 1979--about
1 percentage point more than during the previous year.

During the fourth

quarter, earnings rose at about the same rate for white-collar and bluecollar workers, but for the year as a whole pay advances for blue-collar
workers averaged about 1/2 percent more than those for white-collar
workers.

II-19
HOURLY EARNINGS INDEX 1
(Percent change at compound annual rates;
based on seasonally adjusted data) 2

Feb. 78
to
Feb. 79
Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Total trade
Services

Feb. 79
to
Feb. 80

1979
H

1980

Jan.

Feb.

8.4

8.1

7.4

8.5

8.4

4.3

9.4

8.4
8.7
7.9
8.1

8.9
8.8
9.1
6.5

8.9
9.1
8.4
7.1

8.1
7.9
8.6
6.6

9.0
8.0
10.6
4.8

3.1
2.0
5.2
-11.4

11.7
13.1
9.1
27.9

7.4
9.2
7.5

8.4
8.0
7.7

6.3
7.5
5.9

15.9
7.2
7.3

8.7
7.3
10.8

-.8
16.5
1.8

7.0
4.9
5.5

1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime pay in manufacturing.
2. Changes for other than monthly and yearly periods are compounded.

EMPLOYMENT COST INDEX
(Percent change at compound annual rates,
not seasonally adjusted)

19792
19781
Total private nonfarm
By occupational group:
White-collar workers
Blue-collar workers
Service workers

19791

7.7

8.7

8.2

7.8

8.7

10.0

7.2
8.2
8.7

8.6
9.0
7.2

7.8
7.8
13.4

7.0
9.5
3.6

9.5
8.2
4.5

10.0
10.4
7.4

1. Percent change from fourth quarter of preceding year to fourth
quarter of year indicated.
2. Percent change from previous quarter, expressed at a compounded
annual rate.

APPENDIX A

DEFENSE-RELATED MANUFACTURING ACTIVITY*

Summary. Most indicators of defense-related activity in the
manufacturing area have risen very sharply since 1977.
(See table 1,
which follows.) Some of this increased activity resulted from military
contracts awarded prior to 1977 but most came from the very sharp rise
in such contracts (especially for aircraft and parts) in the last half
of 1977 and the first half of 1978. Largely as a result of these awards,
there have been sharp increases in unfilled orders and inventories of
defense goods beginning in the first half of 1978 and continuing through
the second half of 1979, and somewhat smaller rises in production and
shipments of defense-related items. Currently, defense goods unfilled
orders are sufficient to maintain the advanced fourth quarter level of
shipping activity for about 15 months, or until March 1981, even if no
further orders are booked.
Long production times are involved in much of defense spending. As
can be seen from the following table, in spite of the rapid increase in
contract awards over late 1977 and early 1978, there was only a 7-1/2 percent rise in purchases, as measured in the national income and product
accounts, by the end of 1978. The 18 percent gain in purchases that
occurred over 1979 apparently reflected these earlier contract awards.

DEFENSE CONTRACTS AND SPENDING
(Indexes 1977-Q1 = 100)
1979

1978

1977
H1

Contract Awards 102.9

116.2 131.1

113.5 132.6

108.7

141.7

n.a.

Purchases,
excluding
compensation
(NIPA basis)

101.5

104.4 106.5

107.6 111.7

116.6

122.1

127.5

Memo:
Implicit Price
Deflator for
line B

102.5

106.3 111.4

114.4 118.4

120.2

124.7

129.1

Prepared by James D. August, Economist, National Income Section,
Division of Research and Statistics.

A-1

Contract Awards. Between the first quarter of 1977 and the third
quarter of 1979 the value of total military prime contract awards reported
by the Defense Department increased by about 42 percent. The value of
contract awards for defense capital goods, a component of total contracts,
rose 33 percent during the same period (see table 1). This latter category
includes very substantial increases in awards for aircraft, ships, and
electronic and communication equipment. Over this time span, awards for
aircraft and parts averaged a little over one-third of the defense capital
goods total; indeed, in 8 of the last 33 months, such awards were in
excess of $1.5 billion.
Unfilled Orders and Shipments. Over the last 36 months the value
of unfilled orders for defense capital goods has increased more than 50
percent with the bulk of the increase coming in 1978 and 1979. The ratio
of unfilled orders to shipments--an indicator of average production lags-rose from a 12 months backlog in early 1977 to a peak of about 16 months
in mid-1979 before tapering off just a bit in the waning months of the year
(see table 2, which follows). The Census Bureau does not make available
any industry breakdown for defense orders and shipments--defense and
nondefense are combined in the industry detail. However, an examination
of available data suggests that much of the runup in unfilled orders has
been in aircraft and parts with a lesser amount in communication equipment.
Manufacturers' shipments of defense goods have increased rapidly
in recent quarters probably reflecting the strength of aircraft orders.
There also appears to have been some increase in shipments of communication
equipment during the period, although the defense portion probably has
been swamped by shipments to the private sector. There is a complicating
factor in the shipbuilding sector since shipments are reported as value
of work performed in a given period rather than actual shipments; with
this qualification in mind, however, the data seem to indicate a moderate
increase in defense-related shipbuilding activity in private yards.
Despite the rapid advance in defense activity recently, it appears
that only in production of aircraft has a capacity problem developed and
that stems primarily from difficulties in obtaining some rare metals, such
as titanium. There is also a problem in producing forgings for engines
and stampings for wings; in both of these areas lead times are very long.
Capacity problems in this area hinge primarily on the urgency with which
deliveries are desired.
Inventories. The increase in defense inventories over the three
year period has also been quite substantial. Again, the industry detail
suggests that the increases have mainly been in aircraft and parts and
possibly some communication equipment. There is no detail available on
inventories by stage of processing. One problem in analyzing the defense
inventories is the aforementioned treatment of shipbuilding. When work
is reported as done, that value is taken out of the inventory of the
producer and added to federal purchases. Thus, the Defense Department
technically can have purchased a fraction of a ship while the shipyard
still has physical possession of the whole product.

Although there has been a substantial increase in defense goods
inventories both absolutely and relative to shipments in the last two
years, these stocks still account for only a small proportion of the
book value of total business inventories (see table 2). A significant
increase in this proportion only began in about mid-1979, and, at 2.2
percent at year end, the ratio was still well below the levels seen in
the Vietnam era.
Comparison With Vietnam Era Activity. The sharp increases in the
2-1/2 years between 1977-Q1 and 1979-Q3 in prime contract awards, gross
obligations incurred and defense purchases (NIPA basis) are nowhere near
as large as those seen during a similar period in the Vietnam buildup.
As can be seen in the following table, the current increases in obligations and purchases are less than half those of the Vietnam period while
the rise in contract awards is about 60 percent of that during Vietnam.

COMPARISON OF SELECTED DEFENSE INDICATORS:
Vietnam Buildup vs. Today--First 2-1/2 Years

Vietnam Buildup
(Percent Change from
64-Q4 to 67-Q2)

Prime Contract Awards
Gross Obligations Incurred
Defense Purchases (NIPA)

Current Situation
(Percent Change from
7
7-Q1 to 79-Q3)

76.1
55.0
47.0

48.4
22.4
19.0

Table 1
SELECTED INDICATORS OF DEFENSE-RELATED ACTIVITY
(Indexes:
1977-Q1 = 100; seasonally adjusted)
Military
Prime
Contract

Defense Capital Goods 3/

Awards

Production
of Defense
and Space

New
Defense
Total 1/ Capital
Orders
Goods 2/

Unfilled InvenOrders tories

Shipments

Equipment 4/

1977-H1
H2

102.9
116.2

97.9
103.3

115.1
142.8

100.9
103.6

99.0
98.8

98.6
100.0

100.7
100.7

1978-H1
H2

131.1
113.5

124.5
104.3

161.5
163.1

118.8
132.2

104.7
109.2

106.7
107.0

103.8
110.6

1979-H1
H2

120.7
-

109.1
--

148.7
158.9

145.6
149.7

119.9
136.5

115.2
118.8

114.7
116.2

1977-Q1
Q2
Q3
Q4

100.0
105.7
107.6
124.8

100.0
95.7
103.5
103.1

100.0
130.1
99.7
185.9

100.0
101.8
99.5
107.7

100.0
98.0
99.1
98.4

100.0
97.1
99.0
101.0

100.0
101.3
101.8
99.5

1978-Q1
Q2
Q3
Q4

115.6
146.6
104.0
123.0

109.6
139.4
101.6
106.9

151.5
171.4
134.4
191.8

113.5
124.1
127.0
137.3

102.9
106.5
108.0
110.4

105.7
107.7
105.7
108.3

102.1
105.4
109.2
111.9

1979-Q1
Q2
Q3
Q4

132.6
108.7
141.7
-

120.2
98.0
132.8
--

151.8
145.5
149.2
168.6

143.8
147.3
146.9
152.4

117.6
122.1
129.3
143.7

114.7
115.6
114.9
122.6

114.6
114.7
115.1
117.2

173.2

154.4

149.3

121.9

118.1

1980:January
1/

3/
4/

This series contains prime contract awards for aircraft, missile and
space systems, ships, weapons and ammunition, electronic and communication equipment, combat vehicles, other hard goods, soft goods, construction, services, educational and nonprofit institutions and small (under
$10,000) contracts; it is published as series 525 in Business Conditions
Digest (BCD).
This series is composed of awards for aircraft, ships, missile and space
systems, weapons and ammunition, electronic and communication equipment
and combat vehicles. The series is derived from unpublished reports of
the Department of Defense and is seasonally adjusted by FRB Staff.
These series are published monthly in both BCD and the Survey of Current
Business (SCB).
This series is a component of the FRB Index of Industrial Production.

Table 2
RATIOS 1 /
DEFENSE-RELATED ACTIVITY:
(Based on seasonally adjusted data)

Unfilled Orders
to
Shipments

Inventories
to
Shipments

--------- (Months)---------

Defense Inventories
as a Percent of
Total Business Inventories

------ (Percent)------

1977-Q1
Q2
Q3
Q4

12.1
12.7
12.2
12.9

2.52

2:0

2.54
2.52
2.45

1.9
1.9
1.9

1978-Q1
Q2

13.1
14.0
14.6
15.4

2.46
2.49
2.57
2.57

1.9
1.9
1.9
1.9

15.2
15.5
15.6
15.1

2.59
2.67
2.84
2.95

1.9
2.0
2.0

197 9-January
February
March
April
May
June
July
August
September
October
November
December

14.8
16.2
14.7
15.2
16.3
14.9
16.1
14.9
15.7
15.3
15.0
14.9

2.52
2.73
2.51
2.57
2.79
2.64
2.89
2.73
2.91
2.94
2.95
2.97

1.9
1.9
1.9

1980-January

15.2

3.05

Q3
Q4
1979-Q1
Q2

Q3
Q4

Quarterly ratios are average of monthly ratios.

1.9
2.0
2.0
1.9
2.0
2.0
2.1
2.2
2.2

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest data
Indicator
Period

Level

Month
age

S billions
Monetary and credit aggregates1
Total reserves
Nonborrowed reserves
Money supply
M-1A
M-1B
M-2

M-3
Time and savings deposits (Gross)
Thrift deposits (S&Ls + MSBs
+ Credit Unions) Total
Bank credit

February
February
February
February
February

Net Change from:
Year
Three
months ago
ago

Percent at annual rates

43.1
41.4
376.2
392.1-

-3.8
-15.7

5.0
7.8

4.8
3.2

11.6
11.1

7.1
"7.7

7.5
8.9

February

1545.1

9.7

8.1

9.4

February
February

1802.3
677.4

11.6
16.5

9.0
8.4

9.9
8.3

February
February

667.3
1164.5

0.7
17.9

2.0
11.7

6.1
11.5

Latest data
Percent
or index
Period
Market yields and stock prices
Federal funds
Treasury bill (90 day)
Commercial paper (90-119 day)
New utility issue Aaa
Muncipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)
Dividend price ratio (common stocks)
NYSE index (12/31/65=50)

wk. endg.
"
"
"
"
"
1 day
wk. endg.
end of day

3/5/80
3/5/80
3/5/80
3/7/80
3/6/80
3/5/80
3/5/80
3/10/80

16.17
14.62
15.34
14.02
8.94
15.26
5.49
60.59

Net Change from:
Three
Month month
Year
ago
ago
ago

3.37
2.53
2.27
1.06
1.23
1.50
.26
-5.24

2.41
3.04
2.64
2.80
1.77
2.84
-.04
-.76

6.10
5.21
5.38
4.41
2.59
4.83
.07
5.63

Net Change or Gross Offerings
Year
Year to date
Latest
1979
data
ago
1980
Period
Credit demands
Business loans at commercial banks1
Consumer instalment credit outstanding1
Mortgage debt outstanding (major holders)1 3
Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings)
Federally sponsored agcy. (net borrowing)
U.S. Treasury (net cash borrowing)
1/
/
/

Seasonally adjusted.
$ billions, not at annual rates.
Includes comm'l banks, S&Ls, MSBs,

Year to date 1979 and 1978.
e - Estimated.
*

February
January
November
January
February
January
January

life ins. cos,

5.9
1.4
8.0
2.4e
2.4e
2.4e
5.2

FNMA and GCMA.

4.4
3.1
9.8
1.3
2.6
1.1
3.3

11.0
10.0
1.4
3.1
93.4* 102.8*
2.4e
1.3
5.4e
5.4
2.4e
1-1
5.2
'.3

DOMESTIC FINANCIAL DEVELOPMENTS

Interest rates have soared since the February 5 FOMC meeting.
Yields on money market instruments have climbed 3 to 4 percentage points,
an extraordinary movement in so short a period.

Meanwhile, long-term

bond rates, extending January's sharp ascent, have risen another 1/2 to
1-1/2 percentage points.

Dealers occasionally found it necessary to

slash bond prices by several points in order to attract appreciable
retail demand, as traditional institutional buyers reportedly were shunning long-term fixed-income securities.

Equities apparently benefitted

from the swing in investor sentiment for a time, and share prices continued to advance until late February, despite the rise in interest
rates; however, the stock market has dropped precipitously in the past
two weeks.
Contributing to the rise of interest rates was the tightening of
the federal funds market as the System raised the discount rate and
reduced the supply of nonborrowed reserves in the face of accelerated
growth in the monetary aggregates.

However, the runup in bond rates

appeared to owe more to a marked shift in expectations associated with
outsized increases in major price indexes, indications of persistent
buoyancy in consumer and business spending, and prospects for deficitexpanding increases in defense spending.

Bond yields have shown signs

of leveling off most recently, partly in response to reports of imminent
anti-inflationary action by the government, but the markets have remained
highly unsettled and volatile, with substantial intra-day price movements
and relatively wide bid-asked spreads.

III-1

III-2
SELECTED FINANCIAL MARKETS QUOTATIONS
(percent)

FOMC
Oct.5

1979-19802
FOMC
FOMC
Jan.9
Feb.5

Change from:
FOMC
FOMC
FOMC
Mar.11 Oct.5 Jan.9 Feb.5

13.55

11.91

13.94

12.80

16 . 6 1p

4.70

2.67

3.81

9.63
9.75
9.54

10.70
10.63
10.28

11.76
11.75
10.76

12.22
12.11
11.60

15.38
14.89
13.78

4.68
4.26
3.50

3.62
3.14
3.02

3.16
2.78
2.18

12.25
12.25
12.00

11.73
11.86
11.84

13.07
13.04
12.50

13.02
13.09
12.85

16.63
16.86
16.23

4.90
-5.00
-4.39

3.56
3.82
3.73

3.61
3.77
3.38

12.58
12.64
12.30

12.09
12.50
12.80

13.33
13.36
13.33

13.23
13.46
13.70

17.07
17.41
17.50

4.98
4.91
4.70

3.74
4.05

4.17

3.84
3.95
3.80

13.78
14.01

12.45
12.79

14.59
14.56

13.94
14.29

18 .13p
18.70p

5.68
5.91

3.54
4.14

4.19
4.41

12.00

13.50

15.25

17.75

4.25

2.50

8.84
8.14
n.a.

10.01
9.60
9.36

10.68
10.58
10.29

12.10
11.73
11.64

13.61
12.41
12.12

3.60
2.81
2.76

2.93
1.83
1.83

1.51
.68
.48

7.15

6.64

7.32

7.52

8.94

2.30

1.62

1.42

Corporate Aaa
New issue6
7
Recently offered

10.61
10.52

10.22
10.25

1 4 . 0 2p

3.80

11.42

12.35

13. 8 5p

3.60

2.43

1.50

Primary conventional
mortgages 7

10.03

11.35

12.85

14.00

2.65

1.15

FOMC
Jan.9

FOMC
Feb.5

1974 1
High

i
Short-term rates
Federal funds 3
Treasury bills
3-month
6-month

1-year
Commercial paper
1-month
3-month
6-month
Large negotiable CDs

1-month
3-month
6-month
Eurodollar deposit
1-month
3-month

Bank prime rate
Intermediate- and longterm rates
U.S. Treasury
(constant maturity)
3-year
10-year
30-year
Municipal
(Bond Buyer)

1974
Low8
Stock prices
Dow-Jones Industrial
NYSE Composite

AMEX Composite
NASDAQ (OTC)
1.
2.
3.
4.
5.
6.
7.
8.

FOMC
Oct.5

0OMC
Jan.9

FOMC
Feb.5

FOMC
Mar.11. Oct.5

577.60
32.89

897.61
63.39

850.09
62.72

876.62
65.83

826.45
61.33

58.26
54.87

235.15
152.29

251.75
151.60

278.25
162.20

271.93
144.56

Statement week averages except where noted.
One-day quotes except as noted.
Averages for statement week closest to date shown.
Secondary market.
One-day quotes for preceding Thursday.
Averages for preceding week.
One-day quotes for preceding Friday.
Calendar week averages..

-71.16 -23.64 -50.17
-4.50
-2.06 -1.39

36.78
-7.73

20.18 -6.32
-7.04 -17.64

III-3

With the pronounced deterioration of long-term financing conditions,
businesses continued to borrow heavily in shorter-term markets during
February.

Business demands on commercial banks--particularly for loan

commitments-appear in part to have reflected efforts to tie down funds
in anticipation of possible future constraints on credit availability.
In the household sector, consumer installment and residential mortgage
credit flows, which had slowed in earlier months, likely were further
damped by a tightening of creditors' lending policies prompted by a
continued erosion of interest rate margins and, at thrift institutions,
by outflows of small time and savings deposits.

The rise in borrowing

costs also disrupted the financing plans of some states and localities,
with statutory interest rates ceilings coming into play in certain instances.

The volume of offerings of marketable securities by the U.S.

Treasury meanwhile has been boosted by the need to offset redemptions of
savings bonds and of nonmarketable issues to foreign official institutions, the latter related to efforts by some central banks to buttress
their currencies in foreign exchange markets.
Monetary Aggregates and Bank Credit
Growth in M-1A surged to 11-1/2 percent at an annual rate in February.

Although currency growth moderated somewhat from the very strong

January pace, demand deposits rose sharply following virtually no change
in January.1

It appears that average growth of M-1A over the past

1. Early in the month, a big increase in demand deposits coincided with
a large reduction in Treasury cash balances. Large shifts of funds
between the government and private sectors often appear temporarily in
weekly fluctuations of the money stock, but such shifts generally have
only a small impact on monthly growth rates. Early Social Security
payments may also have boosted M-1A slightly.

III-4
MONETARY AGGREGATES
1
(Based on seasonally adjusted data unless otherwise noted)

p
Q2

Jan.

'79

Feb.

1980

1979

Feb.

to
Feb. '8 0 e

Percentage Change at Annual Rates --

Money stock measures
1.
2.
3.

7.8
10.7
10.2

Selected components
5. Currency
6.
Demand deposits
7. Other checkable deposits,

NSA 2

8.
9.
10.
11.
12.
13.
14.
15.

M-2 minus M-lB (9+10+11+14)
Overnight RPs and Eurodollars, NSA 3
Money market mutual fund shares, NSA
Savings deposits
at commercial banks
at thrift
institutions
Small time deposits
at commercial banks

16.
17.

at thrift institutions
Large time deposits

18
19.
20.

at commercial banks,
institutions
at thrift
Term RPs, NSA

net

4.7
5.3
7.2

3.6
4.3
7.0

11.6
11.1
9.7

7.5
8.9
9.4

10.3

9.9

7.9

11.6

9.9

8.1
7.6
102.8

11.1
8.0
46.7

8.1
3.4
15.7

13.6
-0.5
22.2

10.1
12.2
0.0

9.4
6.7
52.8

10.0
35.4
204.1
-9.7
-7.4
11.8
20.4
22.5

10.4
-4.7
166.2
-1.5
-0.4
-2.5
14.4
21.5

7.8
-17.3
120.0
-21.0
-15.1
-26.0
24.4
28.5

7.9
39.8
151.4
-13.2
-11.7
-14.6
10.8
26.2

9.2
-43.4
188.2
-21.8
-16.1
-26.8
17.1
29.1

9.5
1.7
291.7
-11.9
-9.0
-14.4
20.3
27.6

19.3
-4.8

M-3

8.8
10.1
10.3

8.8

M-1A
M-1B
M-2

10.4
9.5

22.3
30.3

2.0
15.9

10.1
25.9

15.2
12.9

-9.0
40.9
34.6

2.5
72.2
13.8

22.6
90.8
5.4

8.3
63.4
0.0

20.2
60.2
4.0

5.5
88.2
14.7

-Average

Monthly Change in

Billions of Dollars--

MEMORANDA:
21.
Managed liabilities at commercial

banks (22+23)
22.
23.
24.
25.
26.

Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions, NSA
Other 5
U.S. government deposits at
6
commercial banks

1.8

9.5

-1.5

4.2

13.1

4.2

-3.0
4.8

4.3
5.2

2.2

1.1

6.0

1.4

-3.7

3.1

7.1

2.8

3.6
1.3

2.9
2.2

-2.2
-1.4

0.8
4.0

1.3
5.8

1.5
1.3

1.0

0.6

-1.1

4.6

-1.5

0.2

1. Quarterly growth rates are computed on a quarterly average basis.
2. Consists of ATS and NOW balances at all institutions, credit union share draft balances, and
demand deposits at mutual savings banks.
3. Overnight and continuing contract RPs issued to the nonbank public by commercial banks,
net of amounts held by money market mutual funds, plus overnight Eurodollar deposits issued by
Caribbean branches of U.S. member banks to U.S. nonbank customers.
4. Net of large denomination time deposits held by money market mutual funds and thrift
institutions.
5. Consists of nondeposit borrowings of commercial banks from nonbank sources, calculated as the
sum of federal funds purchased, security RPs, other liabilities for borrowed money (including
borrowings from the Federal Reserve), and loans sold less interbank borrowings.
6. Consists of Treasury demand deposits at commercial banks and Treasury note balances.
e--estimated.
n.a.--not available,
p--preliminary.

III-5

several months has been consistent with what money demand relationships
suggest for this aggregate in a period of rapid expansion in nominal
income and spending and sharp increases in money market yields.

Because

the interest-bearing component of M-1B was unchanged in February, growth
of this broader transactions measure was slightly below that of M-1A.
M-2 expansion quickened to a 9-3/4 percent rate in February, up
from 7 percent in January.

Growth of the non-M-1B component of M-2--

consisting of savings and small time deposits at all depositary institutions, shares of money market funds, and overnight RPs and Eurodollars-was somewhat faster in February than in the preceding month, but remained
moderate.

Inflows to small time deposits at all depositary institutions--

apparently led again by MMCs and the new 2-1/2 year and over account--and
to money market mutual funds strengthened in February (measured on a
monthly average basis), while outflows from savings accounts accelerated.
Indeed, at thrift institutions outflows from savings and fixed ceiling
small time deposits exceeded inflows into variable ceiling accounts, and
total savings and small time deposits declined, albeit at a slower rate
than in January.
MMCs attracted $24.6 billion, net, during January at all depositary
institutions (month-end basis, not seasonally adjusted).

The commercial

bank share of MMCs outstanding edged upward, extending the trend that
began last March when the inter-institutional rate differential was eliminated (see table, page III-6).

On the other hand, the distribution of

January inflows to the new 2-1/2 year and over variable ceiling accounts-which have a 1/4 point differential and no legal minimum denominations--more

III-6

MARKET SHARES OF VARIABLE CEILING ACCOUNTS
(Based on not seasonally adjusted data)

Total balances
(billions of
dollars)

Market shares
Commercial banks Thrift institutions
(percent)
(percent)

MMCs outstanding:
March 19792
December 1979
January 1980

135.7
265.3
289.9P

4-year and over
variable ceiling
accounts outstanding:
December 1979

6.8P

2-1/2 year and over
variable ceiling
accounts issued in:
January 1980

5.3P

Total variable
ceiling accounts
outstanding:
January 19803

302.0P

40P

p-preliiminary.
1. Consists of deposits at commercial banks, mutual
savings and loan associations.
2. On March 15 the 1/4-point rate advantage on MMCs
tions was removed for 6-month Treasury bill auction
3. Assumes no early withdrawals from the 4-year and
accounts outstanding in December 1979.

60P

savings banks, and
at thrift institurates above 9 percent.
over variable ceiling

III-7

closely resembled pre-March 1979 shares of the MMC market. 1

Commercial

banks received 32 percent of the $5.3 billion January inflow to the
2-1/2-year accounts, after having acquired 28 percent of the 4-year and
over variable ceiling deposits issued last year.
To restrain monetary growth, the System reduced nonborrowed reserves
in February.

Pressures in the federal funds market intensified late in

the month and in early March, as the surge in deposits was reflected with
a two week lag in larger required reserves.

Borrowing from the discount

window advanced from about $1.2 billion in January to nearly $1.7 billion
in February and by the week ending March 5 borrowed reserves had expanded
to $2.5 billion.
Total loans and investments at all commercial banks rose at an
estimated 18 percent rate in February, up from 12-3/4 percent in January
and well above the reduced fourth quarter pace.

As in January, business

lending by large banks (including agencies and branches of foreign institutions) paced the credit expansion.

Business loans at small banks also

expanded in February, after having declined in the preceding two months.
Bank loans to finance companies registered a substantial increase in
February, in part reflecting a decision by a leading finance company to
turn to commercial banks in the latter part of the month instead of putting additional pressure on a highly sensitive commercial paper market.
Among the major loan categories, only security loans fell, likely reflecting inventory cutbacks by security dealers.

Bank investments accelerated to

1. Effective March 1, 1980 an 11-3/4 percent cap was placed on the nominal
ceiling rate payable on 2-1/2 year and over certificates at commercial
banks; at thrifts the cap is 12 percent. In the absence of the cap on
these accounts, the ceiling would have been 13-1/4 percent at commercial
banks and 13-1/2 percent at thrifts in March.

III-8
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data) 1

e
Q4

Jan.

Feb.

'79

Feb.

1980

1979

Feb.

'8 0 e

---------- Commercial Bank Credit --------1.

Total loans and investments
at banks2

11.9
5.4

Investments

15.8

3.4

12.8

17.9

8.5

3.5

4.2

1.7

-5.9

-7.7

11.5

14.7
18.0

Treasury securities

3.8

Other securities

6.2

12.1

8.3

10.0

13.1

9.2

14.2

18.2

3.3

15.8

19.0

12.9

22.7

5.8

20.9

23.8

17.2

Total loans 2

Business loans

16.6

Security loans

38.1

8.7

-88.5

-19.7

-19.8

-16.6

Real estate loans

13.0

14.7

14.2

12.9

13.2

14.5

Consumer loans

12.4

7.5

5.5

6.6

n.a.

10.

Total short- and intermediateterm business credit (sum of
lines 13,14 and 15)

Short- and Intermediate-Term Business Credit --

20.1

27.4

6.3

24.4

n.a.

16.6

21.7

6.2

24.4

21.2

17.1

nonfinancial firms 3

65.7

69.7

15.5

81.6

49.7

65.2

13.

Sum of lines 11 & 12

20.3

25.7

7.0

28.0

24.0

20.6

14.

Finance company loans to
business 4

17.7

9.4

4.0

-8.5

n.a.

Total bankers acceptances
outstanding 4

23.3

74.9

4.6

52.3

n.a.

11.

12.

15.

Business loans net of
bankers acceptances 1
Commercial paper issued by

1. Average of Wednesdays for domestic chartered banks and average of current and preceding ends of months for foreign-related institutions.
2. Loans include outstanding amounts of loans reported as sold outright to a bank's own
foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding
company (if not a bank), and unconsolidated nonbank subsidiaries of the holding company.
3. Average of Wednesdays.
4. Based on average of current and preceding ends of months.
e--estimated.
n.a.--not available.

III-9

a 14-3/4 percent annual rate in February, with bank holdings of Treasury
securities increasing for the first time since October.
The growth in bank credit in February exceeded inflows of core
deposits by a considerable margin, and banks increased their reliance on
managed liabilities.

Large time deposits rose $6 billion in February,

substantially above the $1 billion issued in January.

Estimated inflows

of nondeposit funds of $7 billion during February also exceeded those of
January.

Most of this nondeposit inflow took the form of borrowings

other than Eurodollars, as net Eurodollar borrowing from related foreign
institutions has shown little tendency to return to the higher levels of
the third quarter of last year, even after adjusting for the impact of
diminished weekend reserve avoidance activities (discussed in an appendix
to this section).
Business Finance
Besides borrowing heavily from commercial banks in February, nonfinancial businesses continued to tap the commercial paper market for
a sizable amount of short-term funds.

Growth in these two credit sources

was 24 percent in February, down from the 28 percent rate in January,
but far above the pace of 7 percent in the fourth quarter of last year. 1
Demands for short- and intermediate-term credit have been bolstered
by a reluctance of many corporations to borrow in the long-term market--as
indicated by the small volume of industrial issues and a number of cancellations and postponements of scheduled bond issues--at a time when markets

1. By contrast, finance company business credit outstanding declined in
January, mainly reflecting a further reduction in loans on automobile
dealer inventories.

III-10
GROSS OFFERINGS OF CORPORATE SECURITIES
(Monthly totals or monthly averages; in millions of dollars)
1979

1980
Jan.p

Feb.

Mar.

-------- Seasonally adjusted -------Corporate securities--total

4,370

4,285

5,150

4,150

3,600

Publicly offered bonds

2,190

2,090

2,620

1,675

1,400

Privately placed bonds

1,460

1,065

900

720

1,130

1,630

1,575

1,300

Stocks

------ Not seasonally adjusted -----Publicly offered bonds--total
By quality1
Aaa and Aa 2
Less than Aa
By type of borrower
Utility
3
Industrial
Financial

2,280

2,005

2,400

1,400

1,225
1,055

1,120
885

1,800
600

475
925

700
635
945

825
735
445

1,315
435
650

1,600

815
435
150

p--preliminary. f--forecast.
1. Bonds categorized according to Moody's bond ratings.
2. Includes issues not rated by Moody's.
3. Includes equipment trust certificates.
PUBLIC OFFERINGS OF NOTES AND BONDS BY NONFINANCIAL CORPORATIONS
(Billions of dollars)
Less than 10 years
as a percent of
total nonfinancial

Public Utilities
Less than
Total
10 years

Industrials1
Less than
10 years
Total

1974
1975
1976

11.3
12.9
8.1

3.4
2.8
--

9.0
19.9
9.9

2.0
2.5
1.5

1977

8.2

0.2

6.1

0.4

1978

7.2

4.9

0.3

2.5

1979

9.0

0.8

7.6

1.6

14.5

197 9-Q1
Q2

1.8
2.6

0.1
0.4

0.8
2.3

00
0.4

3.9
16.3

1.4

2.8

0.7

16.7

3.3

0.3

1.7

0.6

18.0

1980-Jan.

1.3

0.2

26.7

Feb.

0.8

0.3

0.4

25.0

1. Excludes equipment trust certificates.

26.6
16.2
8.3

4.2

III-11

are highly unsettled and bond rates are at record levels.

A shift in pre-

ferences toward short-term borrowing was confirmed by an informal Systemwide survey of commercial banks taken in early March.

Moreover, there

was growing evidence--also confirmed by the Systemwide survey--of businesses seeking larger credit lines and/or borrowing in anticipation of
credit controls or other regulatory actions that might jeopardize the
availability of funds in the future.

Although the substantial increase

in the prime rate may have tempered demands for bank loans by some firms
late in February and early in March, its advance fell short of increases
in most other money market rates.

Gross public offerings of corporate bonds declined from $2.6 billion
in January to less than $1.7 billion in February (seasonally adjusted),
below the 1979 average.

A restructuring of offerings toward shorter

maturities has accompanied the deterioration of long-term market conditions since year-end.

During January and February, nonfinancial debt

offerings maturing in less than 10 years accounted for one-fourth of the
total, up appreciably from 1979 and the largest share since 1974 (see
table, page III-10).
The recent rapid growth in short-term borrowing by businesses,
coupled with the slowing of longer-term borrowing, has contributed to a
further erosion of corporate liquidity.

The aggregate ratio of short-term

debt to long-term debt appears likely in the current quarter to continue

1. The latest survey of Senior Loan Officer Opinion--taken in midFebruary--indicates that even prior to the recent runup in money
market rates and bank costs of funds, there had been a noticeable
tightening in lending policies. The Greenbook supplement will contain
a discussion of this survey.

III-12

LIQUIDITY MEASURES FOR NONFINANCIAL CORPORATIONS
(Seasonally adjusted)

Ratio
Short-term Market Debt/Long-term Market Debt

---

.40

.38

.36

.*
34

-4 .32

.30

.28

I
1968

I
1970

I
1972

1974

I
1976

I l I IIIII
1978

Assets/Total Current Liabilities

_ _
1980
.38

.36

S.34

.32

.30

.28

.26

1968
Source:

1970

197

Flow of funds.

Data for 1980-Ql are preliminary.

III-13

its climb beyond the level experienced in 1974, while the ratio of
liquid assets to current liabilities is nearing its 1974 low (see chart,
page 111-12).

Nevertheless, corporations may continue to rely on short-

term borrowing to a larger degree than usual--and can call upon an
unprecedented amount of unused commitments at large commercial banks,
amounting to almost $200 billion in January. 1
The volume of new equity offerings was bolstered in -January and
February by share prices that, overall, reached an all-time high before
turning down in late February.

New common and preferred stock offerrings

are estimated to have totaled about $1.6 billion (seasonally adjusted)
in both months, well above last year's $920 million monthly average.
Public utilities continue to account for a large portion of offerings,
although new equity offerings by manufacturing and other industrial
corporations have increased sharply in recent months.

Many of these

stock offerings have been by smaller industrial concerns.
Government Debt Markets
The Treasury raised $4.9 billion (not seasonally adjusted) of new
money through sales of marketable debt during February.

Of this amount,

$2.6 billion was raised in the mid-quarter refunding, $1.7 billion was
raised in regular weekly and monthly bill auctions, and the remaining
$600 million was obtained from regular 2-year note issues.
debt, by contrast, declined during the month.

Nonmarketable

Most of this decline was

concentrated in savings bonds--which fell nearly $1 billion in February

1. Unused formalized credit lines--consisting mainly of term and revolving credit agreements--stood at $85 billion in January, up more than $10
billion from four months earlier. The remainder was in confirmed lines,
which often do not contain a binding commitment to lend.

III-14

GOVERNMENT SECURITY OFFERINGS
(Monthly totals or monthly averages, billions of dollars)

1979
QIII

QIV

Jan.e

1980
Feb.e Mar.

Apr.

Seasonally adjusted
State and local government
securities, gross offerings
Total
Long-term
Short-term

1.77

4.91
3.06
1.85

4.82
2.77
2,05

4.95
3.05
1.90

5.22
3.50
1.72

4.05
2.70

5.34
2.70

4.08
1.61

10.77
3.07

-5.67
1.86

5.01
3.41
1.60

5.53
3.64
1.89

5.77

3.28
2.22

1.69
0.73

4.00

U.S. government securities,
net offerings
U.S. Treasury
Sponsored agencies

Not seasonally adjusted
State and local government
securities, gross offerings
Total
Long-term
Short-term

5.43
3.55
1.88

5.26
3.38
1.88

5.26
3.98
1.28

4.40
3.00
1.40

4.10
2.40
1.70

1.97
2.09

2.17
1.31

6.14
2.48

4.43
2.31

7.55
0.62

5.10
3.40
1.70

7.20
3.20
4.00

U.S. government securities,
net offerings
U.S. Treasury
Sponsored agencies
e--estimate. f--forecast.
1. Marketable issues only.

12.00 -12.10
2.92
1.69

III-15

following a $1.3 billion drop in January--and in holdings of foreign
official institutions seeking to support their currencies on foreign
exchange markets with sales of dollars. 1
The sharp rate increases on Treasury securities of all maturities
have been accompanied by wider bid-asked spreads and a larger range of
bids in weekly auctions, as well as by greater day-to-day and intra-day
volatility.

Nevertheless, apart from a thinness in the coupon sector

on those days when increases in yields were especially large, trading
volume in the cash market generally has been well maintained.

Trading

has remained active in futures markets as well, except on those occasions
when daily price limits have been hit.

Primary Treasury security dealers

as a group have avoided major losses by carrying short positions in
coupons, and a recent special survey of major dealers indicated that
none has incurred extraordinary losses during this recent period of
market turbulence.
State and local governments responded to the jump in interest rates
by cancelling or postponing about $600 million of bonds and another $150
million of short-term notes in February.

Their borrowing totaled less

than $5 billion for the second consecutive month.

Most of the issues

displaced were state agency revenue bonds or local general obligations.
High interest rates, statutory interest rate ceilings, and unstable

1. Nonmarketable Treasury debt held by foreign official institutions
declined about $400 million in February and their marketable holdings
declined about $300 million. Then, in the first week of March, foreign
official institutions liquidated another $1.2 billion of nonmarketable
Treasury securities and $3.1 billion of marketable securities.

III-16
INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS AT SELECTED S&Ls
Conventional home mortgages
Average rate on
Basis point
new commitments
change from
for 80% loans
month or
(percent)
week earlier

Period

Spread1
(basis
points)

Percent of S&Ls 2
with mortgage funds
in short supply

1979--High
Low

12.90
10.38

---

+174
+64

88
54

1979--Aug.
Sept.
Oct.
Nov.
Dec.

11.09
11.30
11.64
12.83
12.90

0
+21
+34
+119
+7

+160
+143
+79
+147
+132

77
83
83
86
85

1980--Jan.

12.88

-2

+118

Feb.

1
8
15
22
29

12.85
12.85
12.88
13.03
13.59

-4
0
+3
+15
+61

+50
+5
-29
-113
-24

88
84
81
85
84

Mar.

14.00

+41

+15

1. Average mortgage rate minus average yield on recently offered Aaa utility bonds.
2. Percent reporting supply of funds slightly or substantially below normal seasonal
patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Government-underwritten
Conventional
Amount
($ millions)
Offered Accepted

Period

1979--High
Low
1980-Feb.

Mar.

Yield
to
FNMA1

Amount
($ millions)
Offered
Accepted

Yield
to
FNMA1

Yields on GNMAguaranteed
mortgage-backed
securities for
immediate
delivery 2

454
19

172
18

13.97
10.92

1,035
37

448
19

13.29
10.42

11.77
9.51

4
11
19
25

161

13.67

525

240

13.76

251

14.57

644

324

15.21

12.53
12.74
13.72
13.65

3
10

324

15.36

535

178

15.26

13.58
13.57

1. Average gross yield before deducting fee of 38 basis points for mortgage servicing.
Data, based on 4-month FNMA purchase commitments, reflect the average accepted bid
3
yield for home mortgages, assuming a prepayment period of 12 years for 0-year loan
without special adjustment for FNMA commitment fees and related stock requirements.
Mortgage amounts offered by bidders relate to total eligible bids received.
2. Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FHA-VA mortgages carrying the prevailing ceiling rate on such loans.

III-17

market conditions were given as reasons for their being withdrawn.

The

volume of bonds postponed because of unstable market conditions was
relatively large, and in most cases proceeds had been earmarked for housing and electric power uses, projects that generally can be delayed or
cancelled.

Offerings of housing revenue bonds continued large in

February, at $850 million, despite cancellations of about $200 million.
Mortgage Markets
Mortgage market conditions have tightened further in recent weeks.
The average yield on new commitments for conventional home mortgages at
sampled S&Ls increased more than 70 basis points in the last half of
February and another 40 basis points in the first week of March to reach
a record 14 percent.

Moreover, press reports indicate that some S&Ls

around the country have raised their mortgage rates above 15 percent-even as high as 17 percent--apparently to shut off loan demands in the
face of uncertainty about deposit flows and credit conditions generally.
The most recent rise in mortgage yields has moved them back above
yields on high-grade corporate bonds.

The spread between the commitment

rate on conventional mortgages and the Aaa utility bond index was 15 basis
points in early March--still a small margin compared with the 100-plus
basis point spreads of the past few years, but a marked readjustment from
the deeply negative value reached briefly in the last half of February.
In an effort to align coupon rates on FHA/VA-underwritten home
mortgages with changing market conditions, the Administration during
February raised the ceiling rate on new loans in two steps from 11-1/2
to 13 percent.

Nevertheless, in the March 3 auction of FNMA's forward

III-18

PROFITABILITY OF THRIFT INSTITUTIONS
Percent
Net Income to Average Assets

Credit unions

_1.0

-40.8

7
0.7

Savings and loan
S \

associations

I\
_

0.3

S-

and .20 percent, respectively, recorded in the first half of 1967.
*MSB earnings data provided by the National Association of Mutual Savbanks*Banks.
ingssavings
1973

1 S-0.3/
I 1974 I 1975 I
1974

1976

1977

1978

I 1979\ I 1980
1980

0 .2

for S&Ls and MSBs were .38 percent
earnings
Previous postwar earnings lows for S&Ls and MSBs were .38 percent
and .20 percent, respectively, recorded in the first half of 1967.
*MSB earnings data provided by the National Association of Mutual Savings Banks.

Note:

III-19

purchase commitments, the average discount on FHA/VA loan contracts
bearing the new 13 percent ceiling rate exceeded 12 points.
Net mortgage lending at S&Ls rebounded slightly in January from
the very low level in December.

At the same time, however, loan

commitments outstanding at S&Ls declined further--to $27.3 billion,
down 16 percent from September.

A special FHLB survey of 130 S&Ls indi-

cates that about four-fifths of these institutions tightened their lending
policies during the second half of February by becoming more selective
in the loans that they would make as well as by raising rates.

At commer-

cial banks, where a sizable share of the lending probably has been for
commercial construction projects, real estate loans grew at a 13 percent
annual rate in February, about the same rate as in January and slightly
below the appreciable pace of 1979.
The profitability of thrift institutions declined significantly
during 1979 (see chart, page

III-18), owing to narrowed interest margins,

and apparently has worsened in early 1980.

Indeed, a good number of

institutions are experiencing operating losses at the present time.1
Moderate increases in returns on mortgages and other assets were accompanied by very sharp increases in costs of funds associated with heavier
dependence on high-cost MMCs, large denomination time deposits, and
nondeposit liabilities. 2

Nevertheless, the capital positions of S&Ls

1. About 10 percent of MSBs in New York State had income losses before
security transactions in the fourth quarter of last year, while 20 percent had losses after security transactions.
2. While there is evidence suggesting that some institutions have
incurred signficant losses by liquidating securities, thus far such
liquidations do not appear to reflect an inability to obtain borrowed
funds.
Some commentators have suggested that operating losses might make
it difficult for thrift institutions to continue selling large CDs and
tapping other private credit sources.

III-20

RATE OF GROWTH IN AUTO AND NON-AUTO
CONSUMER INSTALLMENT CREDIT
(Seasonally adjusted annual rate)
Percent
30
Auto
Non-auto

AI'
"'-

10
-

+
0

SI
1974

1976

1978

o10
1980

DELINQUENCY RATES ON CREDIT CARD ACCOUNTS
AND CLOSED-END CREDIT AT COMMERCIAL BANKS
(Seasonally adjusted, quarterly average)

Percent

i 3.0
Closed-end credit
- - - Credit cards
2.6

\/
2.2

_J1.8

1974

1976
1976

1978
1978

1980
1980

III-21

and MSBs have been relatively strong, at least in book value terms.
Stated net worth of S&Ls relative to their assets was 5.6 percent in
January, about the same level that has been maintained since 1976,
while general reserve accounts of MSBs were 6.9 percent of assets in
December, the highest figure in nearly five years.
Consumer Credit
Growth in consumer installment credit remained at an annual rate
of about 5-1/4 percent in January.

Automobile credit growth in January--

at about a 10 percent annual rate--was only slightly above the fourth
quarter pace but well below that of 1978, while the 3 percent expansion
of non-auto installment credit in January was the slowest in more than
four years (see chart, page 111-20).

In February, loans to individuals

at large commercial banks were very weak.
Terms on consumer installment credit have recently tightened
further.

Average rates of interest on commercial bank installment

loans, which have increasingly been limited by restrictive statutory
ceilings, rose in the three months ending in early February (see table,
page 111-22).

In addition, non-rate terms, including downpayments and

minimum maturities, reportedly have been tightened, and the mid-February
survey of senior bank lending officers indicated less willingness to
make consumer installment loans.

With costs of funds to lenders up

sharply, recent trade reports indicate that consumer credit has become
less available in a growing number of states.
Cost pressures on consumer lenders have prompted a variety of adjustments.

One major bank has established a floating finance charge

on certain consumer installment loans at 1 percentage point above the

III-22
CONSUMER INSTALLMENT

CREDIT1

Dec.r

1980
Jan.

23.8
7.9
21.4

16.2
5.3
16.2

16.5
5.3
31.6

332.3
45.9

319.3
44.9

308.1
44.3

320.4
45.4

287.1
17.7

294.9
18.0

295.6
17.6

291.9
17.2

304.0
17.7

19.6
23.6

12.6
12.3

12.1
11.0

6.8
6.0

8.2
7.2

11.7
10.1

89.0

91.9

94.2

87.5

85.6

93.4

1978

1979

Change in outstandings
Billions of dollars
Percent
Bank share (percent)

44.8
19.4
53.1

35.5
12.9
37.8

37.3
12.8
32.7

Extensions
Billions of dollars
Bank share (percent)

298.4
47.8

322.6
46.4

Liquidations
Billions of dollars
Ratio to disposable income

253.5
17.4

Change in outstandings
Billions of dollars
Percent
Extensions
Billions of dollars

1979
Q4

Total

Automobile credit

1. Quarterly and monthly dollar figures and related percent changes are
seasonally adjusted annual rates.
r--revised.

FINANCE RATES ON CONSUMER INSTALLMENT CREDIT AT COMMERCIAL BANKS
(Annual percentage rate, not seasonally adjusted)
Change in basis points
Nov. 79Feb. 79Feb. 80
Nov. 79

Type

Finance rate
Feb.
Nov.
Feb.
1980
1979
1979

New automobile

11.60

12.85

13.28

+125

+43

Mobile home

12.37

13.51

13.57

+114

Other consumer goods
24-month
12-month

13.59
13.90

14.39
14.56

14.69
14.88

+80
+66

+30
+32

17.05

16.93

17.13

-12

+20

Credit

card

III-23

Federal Reserve discount rate; press reports indicate that creditors
more generally are considering means of introducing greater flexibility
in consumer loan pricing.

On credit cards, interest rates have been

raised, where not already at statutory ceilings, and some issuers have
instituted or increased annual user fees.

Some card plans have dropped

cardholders with small credit lines, who are viewed as being their
riskiest customers.

Several major retail chains have moved to increase

their credit card revenues by changing their formulas for calculating
finance charges.

In an effort to reduce their costly receivables, some

other retailers have encouraged customers to use bank credit cards
instead of in-house credit plans.
The burden of consumer installment debt, as measured by the ratio
of repayments to disposable personal income, at 17.7 percent in January
was above that of December and near the peak level of 18 percent recorded
in the third quarter of 1979.

Delinquency rates on commercial bank

installment loans (overdue 30 days and longer) rose by the end of 1979
to the highest levels in more than four years.

On longer-term household

liabilities, average mortgage delinquency rates (60 days and longer) for
several lender groups--as measured by the Mortgage Bankers Association
series--edged up in the final quarter of 1979 for the third consecutive
quarter.

At S&Ls, however, mortgage delinquency rates in January were

about unchanged from the low levels that prevailed throughout last year.

APPENDIX
WEEKEND RESERVE-AVOIDANCE ACTIVITY*

Weekend reserve-avoidance activity by member banks has fallen off
substantially in the aftermath of the System's October monetary policy
actions. The reduction in such activity has been reflected in a decline
in the Eurodollar component of member banks' managed liabilities and in
an increase in required reserves against net demand deposits. The
change in bank behavior appears to be a result in part of the greater
volatility of the federal funds rate since October 6, a by-product of
the System's reserve-targeting strategy, and, to a lesser extent, of
the marginal reserve program, which has lowered for some banks the
potential savings from such transactions.
The Mechanics of Weekend Reserve Avoidance
Member banks that participate in weekend transactions arrange for
inflows of clearinghouse funds on Friday. Because clearinghouse funds
are not collected until the next business day--which typically is
Monday--the banks are able to claim a cash item in the process of collection deduction or a due-from-bank deduction (hereafter referred to
as "cash items" deductions) from their gross demand deposits for three
statement days. This reduces net reservable demand deposits for a net
of two statement days, because, as will be shown below, weekend transactions result in a corresponding increase in reservable demand deposits
on either Thursday or Monday. 1
The most common weekend transaction before October 6 was the Friday-Monday version. In the most typical form of the Friday-Monday
transaction, the member bank on Friday arranges for its foreign branch
to borrow clearinghouse funds from a U.S. branch or agency of a foreign
bank. The member bank receives the funds from the U.S. branch or agency
of the foreign bank, on behalf of its own foreign branch, reflecting
the transaction on its own books as an increase in liabilities due to
its own foreign branch and an increase in cash items. Net reservable
demand deposits of the member bank thus decline by the amount of the
cash-item deduction for three statement days, while net liabilities due
to its own foreign branches rise by that amount for the same number of
days. On Monday, the member bank collects good funds on its Friday
2
borrowing of clearinghouse funds (thus losing its cash item deduction).
* Prepared by Allan Frankel and Fred Jensen, Economists, Banking Section, Division of Research and Statistics and by Donald Adams, Economist,
Financial Markets Section, Division of International Finance.
1. The deposits affected are primarily interbank. For other deposits
affected, appropriate adjustments are made to prevent a distortion of
the money stock figures. Since member banks typically have arranged
such transactions with U.S. branches and agencies of foreign banks using
their own foreign branches as intermediaries, these are often referred
to as "weekend Eurodollar" transactions.
2. Meanwhile, the U.S. branch or agency of the foreign bank that lent
clearinghouse funds on Friday covers its loan by borrowing in the federal
funds market on Monday. The proceeds of this federal funds borrowing are
then forwarded to its clearinghouse settling correspondent in order to
cover the clearinghouse check issued on Friday.

It also repays the weekend borrowing arranged through its foreign branch.
Because the repayment also is in clearinghouse funds, it will not be collected until the next day; as a result, the member bank's reservable
demand deposits increase on Monday--above their Thursday level--by the
amount of the clearinghouse payment. Thus, the net effect of this weekend transaction is to reduce reservable demand deposits for two statement days. Managed liabilities of the member bank increase by the amount
of the due-to-own-foreign-branch liability for three statement days.
The other common form of weekend reserve-avoidance transactions
is the Thursday-Friday version. In such a transaction, the member bank
makes a loan to a U.S. branch or agency of a foreign bank in clearinghouse funds on Thursday, ordinarily using its own foreign branch as an
intermediary. When the member bank makes the Thursday loan by issuing
an officer's check drawn on itself, its reservable demand deposits
increase that day by the amount of the loan. Because the loan is made
through its own foreign branch, the member bank's net liabilities to
its own foreign branches decline. On Friday, two events take place
involving the member bank and the borrowing U.S. branch or agency of
the foreign bank. First, the member bank delivers good funds to the borrower, simultaneously removing the officer's check from its books and
thereby restoring its gross demand deposit balances to their initial
level. Second, the U.S. branch or agency of the foreign bank repays
the overnight loan to the member bank, using clearinghouse funds. When
this occurs, the member bank adds to its cash-item deductions and
restores its net borrowings from its own foreign branches to their initial level. Having larger cash item deductions on Friday, the member
bank reduces its reservable demand deposits for three statement days-Friday through Sunday--leaving a net reduction for two days.1 Managed
liabilities have been reduced by the amount of the loan for one day.
Recent Behavior of Reserve-Avoidance Activity
In February (through the 27th), the above described weekend
reserve-avoidance activity averaged $11.4 billion per statement week,
about 60 percent of the September figure, which was typical of preOctober 6 levels (see table 1).2 The reduced level of weekend reserveavoidance activity has been reflected in an increase in the daily average
1. U.S. branches and agencies of foreign banks experience increases in
their net demand deposits over the weekend in connection with weekend
transactions. However, their reserve requirements generally are not
affected because these institutions now typically face effective reserve
requirements on their net demand deposits that are zero.
2. A measure of total avoidance activity during a statement week is
given by subtracting member banks' net Eurodollar borrowings from their
own foreign branches on Friday from those on Thursday. To estimate the
Thursday-Friday component, one compares net borrowings on Thursday to
those on the day before. The Friday-Monday component is the difference
between total activity and Thursday-Friday activity.

of net reservable demand deposits of more than $2 billion and of required
reserves of about $350 million.1 Both types of weekend reserve avoidance
activity have generally been reduced in the post-October 6th period,
although the decline in the Friday-Monday version has been relatively
the largest. Changes in incentives traceable to the marginal reserve
program cannot, however, fully explain both reductions.
TABLE 1
WEEKEND RESERVE AVOIDANCE ACTIVITY
(Billions of dollars)
Average for four
statement week
periods ending

Total

Thursday-Friday

Friday-Monday

1979
September 26
November 7
December 5

18.8
6.5
8.2

5.8
2.2
1.6

13.0
4.3
6.6

1980
January 2
January 30
February 27

7.5
9.7
11.4

3.9
3.3
5.5

3.6
6.4
5.9

For a member bank, the Thursday-Friday transaction reduces managed
liabilities, because it involves an increase in a member's gross claims
on its own foreign branches. The Friday-Monday transaction, on the other
hand, increases a member's managed liabilities by raising its gross liabilities to its own foreign branches. The reverse is true for a U.S.
office of a foreign bank--that is, Thursday-Friday activity increases
managed liabilities, while Friday-Monday activity reduces them. U.S.
offices of foreign banks and large member banks--the two parties in
weekend reserve avoidance activity--have both reduced their managed liabilities below base-period levels, but large member banks have, on average, developed a smaller proportional leeway. These member banks must
consider the possible increase in costs of engaging in Friday-Monday
transactions because of the marginal reserve requirement program. But,
the relative positions of the U.S. offices of foreign banks and large
member banks, all other things being equal, should have encouraged
Thursday-Friday reserve-avoidance activity. The expectation that Thursday-Friday activity would increase reflects the fact that an expansion
of this activity would ease the relatively tight position of member
banks without exposing foreign banks to liabilities for marginal
reserves.
I. The 16-1/4 percent reserve requirement rate on net demand deposits,
times the $7.4 billion reduction in reserve-avoidance activity, times
2/7 (the fraction of the statement week for which net demand deposits
are reduced).

B-4

The failure of Thursday-Friday activity to expand enough to offset the decline in Friday-Monday activity is probably traceable largely
to increased volatility of the federal funds rate since October 6.
Participation in weekend reserve-avoidance activity always involves
overnight Eurodollar contracts in clearinghouse funds. Because contracts in clearinghouse funds are not settled until the next business
day, an overnight Eurodollar purchase (sale) is the equivalent of a
one-day forward purchase (sale) of federal funds with a single-day
maturity, implying that participants are exposed to the risk that the
federal funds rate will change on Monday. Increased volatility of the
federal funds rate has made it riskier for banks to take an open position in federal funds, discouraging a large increase in Thursday-Friday
activity and thereby reducing overall weekend reserve-avoidance activity.
There is a conventional forward federal funds market in which a bank
could square its position on the same day. However, available evidence
indicates that a widening of spreads in this market has discouraged its
use since October 6.
Impact on Eurodollar Borrowings of Member Banks
Weekend reserve-avoidance activity distorts reported data on Eurodollar borrowing. Eurodollar borrowings adjusted for weekend reserveavoidance transactions (table 2, column 3) show a different time profile
from the unadjusted data (column 1).
Slightly more than two-thirds of
the apparent $4.6 billion reduction in member banks' Eurodollar borrowings between September 1979 and February 1980 (shown in column 1 of
table 2) can be accounted for by the reduction in weekend reserve-avoidThe adjusted data show that funds
ance activity (shown in column 2).
raised by member banks through their own foreign branches to support
domestic credit activity advanced sharply through early December before
receding in the next three months. Apparently, since early December,
member banks have found it advantageous to finance domestic credit growth
from domestic sources and to reduce their reliance on Eurodollar borrowing.

B-5
TABLE 2
ADJUSTMENT OF MONTHLY MEMBER-BANK EURODOLLAR BORROWING
FOR WEEKEND RESERVE-AVOIDANCE ACTIVITY
(Billions of dollars)
Average for
four statement
weeks ending

1979
September 26
November 7
December 5
1980
January 2
January 30
February 27

Daily net balances
due to own foreign
branches of member
banks
(1)

The contribution
of weekend reserve
avoidance to (1)1
(2)

Member banks' net
Eurodollar borrowings
adjusted for weekend
reserve avoidance
(3) = (1) - (2)

11.4
9.5
12.0

2
5.2
1.52
2.0

6.2
8.0
10.0

5.9
7.0
6.8

1.0
2.32
2.1

4.9
4.7
4.7

1. For a typical statement week, daily net Eurodollar borrowings are increased
by three-sevenths of borrowings done as Friday-Monday reserve avoidance activity and lowered by one-seventh of borrowings done as Thursday-Friday activity.
2. Period included a three-day weekend. Over a three-day weekend, FridayMonday activity enlarges daily borrowings by four-sevenths of the amount borrowed.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets
In late February and early March the dollar came in increasingly
strong demand on exchange markets, triggered by a sharp rise of U.S.
interest rates.

As shown in the chart, the recent shift
in exchange market sentiment in favor of the dollar has raised the
dollar's average exchange value 5 percent above its low point of early
January.

The main reason for the dollar's recent strength has been the
sharp rise in U.S. short-term interest rates and market expectations
of further increases in U.S. rates as the Federal Reserve attempts
to control the growth of U.S. monetary aggregates in the face of
continued high inflation.

An additional reason for the increased

exchange market demand for dollars has been the growing evidence
of rising inflation and widening payments deficits abroad.

A number

of foreign countries have recently moved to tighten monetary conditions in an attempt to contain domestic inflationary pressures
and support the external values of their currencies.
Economic Developments, p. 13.)
IV-

(See Foreign

IV-2
STRICTLY CONFIDENTIAL (FR)
Class II - FOMC

AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

March 1973=100
90

Series

March

IV-3

The currency that has been weakest against the dollar recently
has been the Japanese yen.

From early January to the end of February

the yen depreciated by nearly 10 percent against the dollar.

At the

beginning of March Japanese authorities announced new measures designed
to support the yen.

The Bank of Japan said that it would increase

its intervention support for the yen and that the Federal Reserve
was prepared to provide intervention resources to Japan through the
swap network and to intervene from time to time in New York on its
own account as part of a multilateral effort to avoid an excessive
decline of the yen.

Since the announcement of the yen support measures,

the Bank of Japan has succeeded in halting the decline of the yen

, the Desk has purchased $130 million equivalent of yen
which have been added to System balances

IV-4

The Desk has

acquired nearly $2 billion equivalent of marks

, and

additional net mark purchases equivalent to $1 billion have been
over this

made
period.

Almost all of these $3 billion equivalent of marks have been

used to repay System swap debt, which has been reduced to under $50
million equivalent.

IV-5

Borrowing in international capital markets.

Gross borrowing in

international capital markets ir 1979 appears to have been appreciably
larger than in 1978, but because of higher repayments net borrowing may
have risen by little over 5 percent.

Activity in both the bank credit

and bond markets became depressed late in the year, and was very low in
early 1980.

Spreads on Eurocredits have recently reversed their declin-

ing trend from 1976, and maturities of Eurocredits have shortened.
Gross borrowings announced last year reached $124 billion according to estimates by Morgan Guaranty Trust Co.,
over 1978.

an increase of 18 percent

Morgan Guaranty estimates that repayments

(including advance

refinancings) of Eurocredits and bonds, together with some doublecounting (see table), increased to $58-1/2 billion last year, reducing the
amount of net credit extension to $65-1/2 billion, 7 percent above 1978.

The gross borrowing figures show increases of 18 percent for both mediumterm Eurocredits and international bond issues (Euro- and foreign).
Gross borrowings by industrial countries (45 percent bank credits and
55 percent bond issues) rose a relatively small 10 percent in 1979,

reflecting a big drop in Canadian borrowing from $10-1/2 billion to
$6 billion.

British borrowers also took less, but borrowers in most

other major industrial countries had greater recourse to international

capital markets.

There was little increase in gross borrowings by OPEC

countries; while Venezuela and Nigeria increased their borrowings,
other OPEC countries reduced theirs as oil revenues soared.

For the

non-OPEC LDCs, total borrowings (93 percent in the form of credits)
increased nearly 30 percent.

Most of the principal borrowers in this

IV-6

BORROWING IN INTERNATIONAL CAPITAL MARKETS
(Billions of dollars)

II.

1978
year

Gross Borrowing
A. By type:
Medium-term Eurocredits
Eurobonds
Foreign bonds
B. By country group
Industrial
OPEC
Non-OPEC LDC
Communist
International org's.

75.8

104.5

123.8

30.6

41.8
17.8
16.2

70.2
14.1
20.2

82.8
18.7
22.3

22.1
3.1
5.4

6.5
2.0
3.9

41.1
8.2
16.2
3.6
6.6

53.9
12.0
29.6
3.8
5.2

59.1
13.0
38.1
7.4
6.2

16.1
2.8
9.1
.8
1.7

8.3
1.1
1.9
.5
.7

Repayments and Duplications
A. Eurocredits:
Advance refinancings
Scheduled repayments
B. Bond repayments
C.
Duplications (Eurobond
issues by Eurobanks)

20.3

43.5

58.4

n.a.

) 15.0
)
5.3

8.8
24.0
8.0

13.8
30.0
10.0

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

n.a.

2.7

4.6

n.a.

55.5

61.0

65.4

n.a.

III. Net Borrowing (I-II)
Source:

1979
Q-4
year

1980
Jan.-Feb.

1977
year

12.4

Morgan Guaranty Trust Co.

group stepped up their borrowings, including Mexico and Brazil which
remained the largest borrowers with gross takings of $8.7 billion and
$7.2 billion, respectively.

A doubling of borrowing by Communist coun-

tries in 1979 was the result of China entering the Eurocredit market for
loans of $3.6 billion.
In the fourth quarter, the sharp increase in dollar interest rates
after the Federal Reserve actions of October 6, and investors' increasing
worry over accelerating inflation, discouraged new international bond
issues.

The rate of new issues slowed,

and in

the first

two months of

this year remained well below the average for the first three quarters

IV-7

of 1979.

Because of current conditions, Eurobond issues this year have

consisted almost exclusively of floating rate notes and convertible bonds.
In the market for medium-term Eurocredits the much higher levels of
Eurodollar rates beginning in October, the restrictions imposed by the
Japanese authorities last autumn on the external lending of Japanese
banks, and the uncertainties introduced by the freeze on Iranian official
assets in U.S.-owned banks, began to slow the arrangement of new loans.
This is not apparent from the total of credits announced in the fourth
quarter but can be seen from the low levels of new loans announced in
December and in January-February 1980.

The monthly average of credits

recorded by Morgan Guaranty was $3.7 billion for those three months, compared with an average of $7.4 billion in the first 11 months of last year.
After declining since 1976, spreads on medium-term Eurocredits
appear to have widened slightly, particularly on LDC credits.

Federal

Reserve sample data show a rise in the unweighted average spread on all
credits from .75 percent in the third quarter to .79 percent in the
fourth, while for credits to non-OPEC LDCs alone the average spread rose
from .80 to .91 percent.

In the fourth quarter of 1976 these spreads

had been 1.56 percent for the total sample and 1.90 percent for non-OPEC
LDC credits.

Another change in the terms on Eurocredits has been the

shortening of maturities.

For the total sample, the average unweighted

maturity fell from 9.3 years in the third quarter to 8.5 years in the
fourth; previously, the average maturity had lengthened from 5.7 years
in the fourth quarter of 1976.

IV-8
U.S. International Transactions
In January, the U.S. trade deficit grew to $54 billion at an
annual rate (international accounts basis).

A sharp increase in non-

petroleum imports accounted for most of the deterioration.

Imports of

capital goods and consumer goods were particularly strong.

However,

automotive imports were little changed from November/December levels
despite strong sales of fuel-efficient imported cars.

The resulting

fall in inventories as well as a sharp increase in reported exports
from Japan suggest that U.S. auto imports may pick up in February
and March.

In January there were only small increases in imports

of industrial supplies (nonoil); steel imports were little changed
from November/December levels.
U.S. Merchandise Trade, International Accounts Basis
(billions of dollars, seasonally adjusted annual rates)
1978

1 9 7 9
3Q

Year

EXPORTS
Agric.
Nonagric.

142.1
29.9
112.2

182.4
35.4
147.1

189.2
38.3
150.8

IMPORTS
Petroleum
Nonpetroleum

175.8
42.3
133.5

211.5
60.0
151.5

BALANCE

-33.7

-29.1

1980
*r

Dec.

Jan.

204.4
41.9
162.5

198.1
43.4
154.7

212.4
40.9
171.5

218.4
66.5
151.9

236.0
75.5
160.6

241.2
82.6
158.6

266.5
80.9
185.6

-29.3

-31.7

-43.0

-54.1

NOTE: Details may not add to totals because of rounding.
r/ Revised
*/ The monthly international accounts basis figures are rough
estimates and are subject to considerable revision.

IV-9

Oil imports declined in January, as a 7 percent fall in volume
offset a 5 percent rise in price.

Because of shipping lags, the

unit value for petroleum imports in January ($26.18 per barrel) did
not fully reflect OPEC price increases already announced.
(8.3

The volume

mb/d) was somewhat below the average for the last half of 1979

(8.6 mmb/d).

U.S. petroleum stocks continued to climb on a seasonally

adjusted basis.

Much of the increase was in gasoline stocks, which

were low in November, but are now at above average levels.
Nonagricultural exports rose 7 percent in value in January, but
most of the increase was concentrated in one commodity (numismatic
coins); major commodity categories such as machinery and industrial
supplies were little changed from December or fourth-quarter rates.
Agricultural exports declined somewhat (6 percent) from the
very high December level, as longshoremen
intended for the Soviet Union.

stopped loading grain

The outlook for agricultural exports

in 1980 has been revised upward to $38 billion because of recent
developments:

cotton demand is exceptionally strong and a drought

has cut Argentine feedgrain production.
Official reserves holdings in the United States of the G-10
countries plus Switzerland fell by $2 billion in January, partially
reversing the $4 billion increase in December.

In both months the net

change in official assets mainly reflected German swaps with commercial
banks, designed to influence German credit conditions, rather than
exchange market intervention.

In February and particularly in early

March (through March 7), intervention resulted in a sharp net drop
(about $6 billion) in the assets of the G-10 countries and Switzerland
held at the FRBNY.

RESTRICTED

U.S. International Transactions
(in millions of dollars; receipts, or increase in liabilities, +)
1978
Year

Trade balance 1/
Merchandise exports
Merchandise imports
4.

5.
6.

7.
8.

-33.719 =
-

Change in net foreign positions of banking
offices in U.S. (excl. liab.to foreign official inst.)
Through interbank transactions with
a)
Own offices in foreign countries
b)
Unaffiliated banking offices in foreign countries
Through nonbank transactions
a)
Claims on nonbanks in foreign countries (increase,-)
b)
Liabilities to private nonbanks in foreign
countries (inc. custody liab.)
Private securities transactions,net (excl. U.S.
Foreign net purchases of U.S. corp. bonds
Foreign net purchases of U.S. corp. stocks
U.S. net purchases (-) of foreign securities

13.

Foreign net purchases of U.S.

14.

Change in foreign official reserve assets in U.S. (increase +)

Treas.

Oblig.)

Treasury obligations 2/

By Area
G-10 countries and Switzerland
OPEC
All other countries
By

18.
19.

Type
U.S. Treasury securities
Other 3/

20.

21.

All other transactions and statistical discrepancy

182,423
-211,549

-6.147
41,300
-47,447

-7,747
42,744
-50,491

-7,314
47,288
-54,602

-7,918
51,091
-59,009

-14,975

14,849

14.557

5.053

538

4,943
-4,560

20,982
3,900

15,140
836

6,954
-1,209

-16,434
1,076

-12,356
2,323

-1,018
-402

-712
1,127
1,686
-3,525

-3.577
307
1,035
-4,919

3.866

seasonally adj., annual rates)

19 7 9
Dec.

1980
Jan.

-3 586
16,511
-20,097

-4 468
17,742
-22,210

-5.299

4.009

-13.074

8.980

8,132
-2,345

-9,244
6,617

-1,838
4,822

-7,865
-2,501

5,369
4,077

-2,051
1,360

-5,257
8

-4,029
1,357

185
840

-2,834
126

675
-1,141

-576
1
424
-1,001

-81
279
274
-634

-2.080
6
143
-2,229

-839
22
194
-1,055

-484
-124
59
-420

-244
-23
142
-363

592
196
667
-271

7.381

5.119

-119

1,460

921

-1,089

-198

2,228

31.400

-13,190

-8,082

-10.192

5.557

-473

-5.422

'8.002

-3.693

29,951
-1,165
2,614

-21,027
6,466
1,371

-7,096
-1,472
486

-11,610
346
1,072

4,816
1,624
-883

-7,138
5,969
696

-8,037
1,908
707

4,427
2,319
1,256

-2,142
-983
-568

23,849
7,551

-21,051
7,861

-7,695
-387

-12,623
2,431

5,036
521

-5,769
5,296

-7,186
1,764

3,842
4,160

1,530
-5,223

662

-278

-3,008

412

, 2.712

-394

-1.267

333

-2,034

_13.478

_23.941

-1.863

12.674

-873

14.002

4.263

8 767

-1.605
J=--

-----

MEMO:

Nov.

-2 188
16,927'
-19,115

Change in U.S. reserve assets (increase -)

Current Account (bil. $.

-29.126

1979
03

02
034---

Q1
Q

142,055
-175,774

9.
10.
11.
12.

15.
16.
17.

1979
Year

March 12, 1980

---

-13,5

-------

n.a.

International accounts basis, seasonally adjusted.
Includes U.S. Treasury notes publicly issued to private foreign residents.
Includes deposits in banks, commercial paper, bankers' acceptances, and borrowing under
repurchases agreements.
Includes $1,103 million of newly allocated SDR's.
Less than $500,00.

1.7

---

3.0

n.a.

IV-11

OPEC holdings of official reserve assets in the United States
declined by about $1 billion in January, after climbing almost $6
billion in the fourth quarter of 1979.

Partial data for February

indicate that OPEC holdings at the FRBNY increased about $1 billion.

Part of the fourth-quarter increase was due to a shift of funds from
a special account at Treasury to a special non-negotiable Treasury
security held at the FRBNY. During these five months the net increase
in OPEC official reserve assets in the United States has been small
compared to the size of the OPEC trade surpluses.
Banks reported substantial net inflows in January, partially
reversing the large net outflows reported in December.

For the two

months combined, the net outflow was about $4 billion.

Part of this

sharp reversal in bank flows was the counterpart to the opposite
swings in official asset holdings; central bank swaps with commercial
banks, designed to supply year end liquidity, were reversed in January.
Partial data for February indicate that only moderate net inflows

through interbank transactions have occurred in recent weeks.
A sharp decline in banks' claims on foreign nonbanks took place
in January, in contrast to increases through most of 1979.

Since

the last large decrease in loans to foreign nonbanks was in January
1979, seasonal factors may be operating.
The Euro-dollar holdings of U.S. nonbanks through December
remained at about the peak level reached in the summer of 1979.

the other hand, the CD holdings of open-ended money market mutual funds
and short-term unit trusts have continued to grow.

These holdings

amounted to $9.6 billion in mid-February, as compared with $7.8 billion
at the end of last year and $1.1 billion at the end of December 1978.

IV-12

For 1979 as a whole, and for the fourth quarter in particular,
the balancing item "all other transactions and statistical discrepancy"
was extremely large and positive.

Certain kinds of transactions are

excluded from the table because of long lags before the data are
available.

These include net service income and capital flows between

corporations and affiliated as well as unaffiliated foreigners.

Pre-

liminary data indicate a marked reduction in the flow of funds from
U.S. corporations to their foreign affliates in the fourth quarter.
Even taking into account the preliminary estimates of these transactions, the unreported net inflow in 1979 was very large.

IV-13

Foreign Economic Developments.

Inflation accelerated in foreign

industrial countries between the end of last year and the early months
of 1980.

Althou h the pass-through of oil-price increases contributed

substantially to the acceleration, a wide range of goods and services
registered price increases.

The most striking increases in consumer

prices occurred in Italy, the United Kingdom, France and Sweden.

Japan the sharpest increases occurred in wholesale prices; the passthrough to consumer prices has continued to be relatively moderate,
although the rise in consumer prices in January-February did speed up.
Only in Canada, among the major industrial countries, have consumer
price increases slowed somewhat recently.
Economic activity continues to show strength in some countries,
particularly Japan and Italy; industrial production rose significantly
in the most recent data for Japan, and in Italy there was a slight
decline from very high levels.

Domestic demand was a source of strength

in these countries, although in Japan exports recently appear to have
been the most vigorous sector.

In Germany, industrial production has

been flat from October to January, but at a relatively high level.

France, industrial production in November-December regained some of
the ground lost in September-October.

On the other hand, Canada and

the United Kingdom both showed weak fourth quarter gains in GNP, with
weak domestic demand accounting for the slowdown in Canada.
The virulence of inflation, and fears about exchange-rate weakness, prompted a series of discount-rate increases in February in a
number of countries.

Discount rates were raised in Germany, Japan,

Belgium, Denmark and Switzerland.

France also took steps to tighten

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change, from previous period or as indicated)

Latest 3 Months
from:
Previous
Year
3 Months
(at Ann. Rate) Ago

Latest
Month

1977

1978

1979

1979
Q3

Canada: CPI
WPI

8.0
7.9

8.9
9.2

9.1
14.4

2.5
2.1

1.6
3.3

2.3
4.9

2.6
3.1

2.0
2.7

2.3
3.6

9.7
15.1

9.6
15.1

Jan.
Dec.

France: CPI
WPI

9.5
5.6

9.2
4.3

10.6
13.3

2.7
1.9

2.1
2.9

2.2
4.4

2.8
3.8

3.2
2.8

2.8
1.8

12.2
6.1

12.1
12.8

Jan.
Jan.

Germany: CPI
WPI

3.9
1.8

-0.1
-0.6

0.1
0.1

1.8
3.4

1.4
3.3

1.2
1.7

0.9
1.1

6.1
8.5

5.3
10.3

Feb.
Jan.

2.4
1.8

3.0
2.2

3.9
4.4

3.7
4.6

3.5
4.3

5.5
5.6

26.6
24.6

20.0
21.3

Feb.
Jan.

0.2
-0.6

-0.2
1.9

2.2
4.1

0.9
4.9

1.9
3.3

6.8
24.6

6.5
19.4

Feb.
Feb.

1978

2.6
-0.3

Italy: CPI
WPI

18.4
17.4

12.1
8.4

14.8
15.5

Japan: CPI
WPI

8.3
1.9

4.3
-2.5

3.5
7.3

United Kingdom: CPI
WPI

15.8
19.8

8.3
9.1

13.4
12.2

1.7
1.9

1.7
1.7

3.1
2.7

3.7
4.0

6.7
5.0

2.8
3.0

13.6
18.1

17.7
17.3

Jan.
Feb.

United States: CPI
WPI

6.5
6.1

7.6
7.7

11.3
11.0

2.4
1.7

2.0
2.3

2.5
3.3

3.4
2.5

3.3
2.6

2.9
3:6

12.9
15.4

13.3
12.9

Jan.
Feb.

0.8
-1.7

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted)

1977
Canada:

France:

Germany:

Italy:

Japan:

1978

1979

1978
Q4

1979
Q1

Aug.

Sept.

1979
Oct. Nov.

Dec.
*

1980
Jan.

GNP
IP

0.7
2.6

1.5 -0.6
1.4 -1.2

1.1
2.3

0.2
-0.3

-0.2

2.4

-1.1

-0.4

GDP
IP

1.8
1.8

0.2
0.0

0.4
0.5

1.9
0.7
4.6 -2.4

0.0

-1.4

-2.9

1.5

0.8
0.8

0.4
-0.3

2.0
3.4

1.1
1.9

0.7
0.0

-3.9

0.8

0.0

GDP
IP

2.9
6.1

1.1
1.1

-0.7
-2.6

1.0
1.4

n.a.
7.8

-0.1

6.0

3.8

0.6

GNP
IP

1.6
2.2

1.5
1.8

1.7
2.4

1.7
2.0

1.3
2.6

0.9

-1.5

2.6

1.2 -0.2

1.3

-0.1
-0.9

-1.0
-0.8

3.7
5.2

-1.9
-1.8

n.a.
-0.5

-3.8 -0.6
-3.8 -0.6

0.8
0.8

1.6 -18
1.6 -1.8

n.a.

1.4
1.9

0.3
1.0

-0.6
-0.2

0.8
0.2

0.5
0.0

GNP
IP

United Kingdom:

United States:

GDP
IP
GNP
IP

1.8
3.7

2.7
3.8

n.a.
2.6

5.3
5.9

4.4
5.8

2.3
4.1

* GNP data are not published on monthly basis.

-0.8

0.5

-0.1

-1.3
*

1.5

-1.3
*

0.1

n.a.
*

n.a.

0.8
*

0.3

TRADE AND CURRENT-ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIESa
(Billions of U.S. dollars; seasonally adjusted)
1978

1979

1979
Nov.
Dec.

1980
Jan.

1.3
-0.9

0.5
*

0.6
*

0.2
*

-1.4
0.1

-1.2
0.5

-0.3
*

-0.2
*

-1.1
*

3.8
-1.1

2.4
-4.2

1.5
-1.1

0.9
-0.4

0.2
-0.3

n.a.
-1.2

-0.4
1.1

-0.7
2.1

-1.2
3.9

-2.8
n.a.

-2.1
*

-0.7
*

n.a.
*

4.2
1.7

2.6
0.3

1.8
-0.7

-0.9
-3.8

-1.5
-4.2

-0.7
-1.7

-0.3
-1.3

-0.1
-1.1

-0.8
0.5

-0.2
1.1

-3.2
-2.5

-1.4
-0.8

-1.0
-0.5

-1.6
-1.5

-0.2
-0.1

-0.6
-0.4

-0.8
-0.7

-7.9
-3.2

-6.0
0.1

-6.1
0.4

-7.7
-1.1

-7.3
0.8

-7.9
n.a.

-2.0
*

-3.5
*

n.a.
*

1978

1979

Canada: Trade
Current Account

3.1
-4.6

3.4
-4.3

0.6
-1.2

0.7
-1.5

0.6
-1.2

0.6
-1.3

0.9
-1.0

France: Tradeb
Current Account

0.6
3.8

-2.3
2.4

0.2
0.9

0.1
1.3

0.3
0.6

-0.4
0.7

Germany: Trade
Current Accountc

20.6
8.9

12.1
-5.0

5.4
0.2

5.6
4.8

4.3
1.4

Italy: Trade
Current Accountc

-0.2
6.4

-5.2
n.a.

-0.8
2.5

0.5
1.7

Japan: Trade
Current Account

24.6
16.5

1.9
-8.6

6.8
4.5

d
United Kingdom: Traded
Current Account

-2.3
1.8

-7.3
-5.1

-33.8
-13.5

-29.1.
n.a.

United States: Trade
Current Account
a
b
c
d
*

The current account includes goods, services, and private and official transfers.
French annual data are not seasonally adjusted.
Not seasonally adjusted.
U.K. quarterly data do not reflect revisions in annual totals.
Comparable monthly current account data are not published.

IV-17

monetary conditions, and Japan raised reserve requirements in addition
to raising the discount rate.

The Bank of Canada has announced it will

allow the discount rate to float, a move expected to lead to an increas
in that rate.
The shift into current-account deficit for Japan and Germany in
1979 persisted into 1980; their combined current-account deficit in
January was $2.4 billion.

Recent data also indicate significant wors-

ening of the trade account for France,
Individual Country Notes.
move ahead at a strong pace.

Italy and the United Kingdom.

Activity in Japan has continued to

Fourth quarter GNP grew 1.3 percent, a

slight slowing from the third quarter pace, putting growth for the
full year 1979 at 6 percent.

Industrial production increased sharply

in January to almost 10 percent above the year-earlier level.

Further-

more, the most recent Bank of Japan and Economic Planning Agency surveys
of corporations' production and spending plans tend to support the view
that the current strength would continue relatively undiminished in
the next several quarters; however, these surveys were taken before
the latest monetary policy actions.
Inflation has accelerated since the beginning of the year.

The

combined increase in wholesale prices in January and February was
4-3/4 percent; the monthly increases were the largest in six years.
Consumer price increases --

though strong, as well --

have remained

moderate by comparison; the CPI advanced by 1-1/2 percentage points
in the first two months of 1980 combined.
The authorities have reacted to the continued strong inflationary
pressure and further weakness in the yen with the introduction of

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several measures designed to counteract these trends.

On February 18,

the discount rate was raised by a full percentage point to 7.25 percent,
the fourth increase in the last year.

The authorities also announced

a general increase in required reserve ratios on most commercial bank
deposits.
On March 2, following a decline in the yen's value below the
250¥/$ level, the Japanese government announced a package of yensupport measures, in cooperation with U.S., Swiss, and German authorities.

The new Japanese measures, which are designed to encourage

capital inflows, include:

permission to Japanese banks to transfer

funds to Japan from overseas branches, relaxation of controls on
Japanese banks' medium and long-term foreign currency lending to
residents, permission for private placement of yen-denominated bonds
abroad, and liberalization of interest rates on official holdings
of free yen.
In Germany, industrial production has remained unchanged at the
relatively high levels reached late last year.

Consumer spending

slowed towards the end of last year, but investment has remained
strong.

The decline in the seasonally-adjusted unemployment rate was

slightly reversed in December and January, but in February the rate
once again reached its long-time low of 3.5 percent.
Inflation has accelerated since November; in January producer

prices rose 1.5 percent; consumer prices rose 0.6 percent in January
and 1 percent in February.
In response to the acceleration of inflation, and to maintain
the strength of the DM, the Bundesbank on February 28 raised the

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discount rate (from 6 to 7 percent) and the lombard rate (from 7 to
8-1/2 percent).

But, at the same time, rediscount quotas were increased

and the ceiling on lombard credits was removed.
In the United Kingdom preliminary GDP data for the fourth quarter
of 1979 showed a slight increase (0.4 percent) over the third quarter,
as the increase in consumer demand was nearly offset by falls in fixed
and inventory investment and in other demand components.

The weakness

of activity has continued into early this year, caused in part by the
continuing strike against the nationalized sector of the steel industry,
and most recent surveys point to a decline in activity in the current
quarter.

The unemployment rate rose from 5.3 percent in December to

5.7 percent in February.
The inflation rate accelerated in January, with both wholesale
and retail prices rising 2.5 percent.

Increased energy costs account

for some of the price rise, but many other items, such as the cost of
home ownership and government services, also increased.
After some improvement in November and December, the current
account deficit widened to almost $700 million in January.

A major

factor in the deterioration was a sharp rise in silver imports.
In France industrial production in the fourth quarter of 1979
fell by 2-1/2 percent (seasonally adjusted) after a 4-1/2 percent rise
in the third quarter.

There was, however, an upward trend over the

course of the fourth quarter, and Bank of France survey data indicate
some growth in January.
Consumer prices rose 1.9 percent in January; this increase
reflected the freeing of retail and wholesale margins and increases

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in the prices of public services and oil-products.
The Bank of France has tightened further credit controls by
increasing the fraction, from 40 to 50 percent, of loans for exports,
housing and other privileged activities that are subject to the credit
ceilings effective April 1, 1980.

It has also raised the intervention

rates for one-month Treasury bills.
Economic activity in Italy showed great strength in the last
quarter of 1979, with industrial production nearly 8 percent higher
(not annual rate) than the third quarter level; capacity utilization
in the fourth quarter reached its highest levels in over 5 years.
Although the level of industrial production in December-January was
down slightly, activity was still at a high level, and business surveys
point to continued strength in the short-term.
The inflation rate accelerated early this year, after it had
slowed at the end of last year.

Both consumer and wholesale prices

rose 3.3 percent in January; in February, consumer prices rose 1.7
percent.

Although a large part of the January consumer-price increase

reflected higher oil-product prices and public utility changes, as
well as rent adjustments, the February increases were concentrated
in other goods and services.

A round of plant-level wage negotiations

is beginning, and workers in major industries have made substantial
wage claims.
The November deterioration of the trade account persisted into
December, and the deficit for the two months averaged almost $1-1/2
billion (SA, customs basis; imports c.i.f.).

Import values rose in

part because of oil-price increases, but import volumes increased

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sharply, reflecting a surge in stockbuilding.
Real GNP in Canada grew moderately, at about 1/4 percent
(seasonally adjusted), in the fourth quarter of 1979, after rising
over 1 percent (seasonally adjusted) in the third quarter.

This

places year-over-year growth for 1979 at 2.9 percent compared with
3.4 percent in 1978.

The fourth-quarter slowdown was largely the

result of a decline in real personal expenditure and government
spending, and a slowdown in fixed investment.

The fourth quarter

marked the fifth consecutive quarter of substantial business inventory accumulation.

The stockbuilding during the fourth quarter

reflected in part the weakness of consumer spending on durables in
Canada and the United States.
Consumer price increases slowed in December and January as
Canada has not had the inflationary pressure of oil-price increases
experienced elsewhere because of controls on well-head prices; however, these well-head prices are due to be raised somewhat during
1980.
On March 11 the Bank of Canada announced that it will allow
the discount rate to float 0.25 percent above the average weekly
tender rate for the 91-day Treasury bill.

Although the Bank has

stated that this does not represent a change in monetary policy,
but rather in operating procedures, the timing of the action
reflects the recent weakening of the Canadian dollar and the
expected increase in Canadian interest rates.

Until last week,

the Canadian dollar had not declined, despite a sharp movement in
the interest rate differential in favor of U.S. dollar assets.

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In the Netherlands real activity continues to be strong while
the inflation rate has accelerated.

The government on January 10,

1980 imposed a two-month wage freeze because of the failure of tripartite talks among unions, business and government to reach agreement
on real wage increases in 1980.

The government has revised the 1980

budget in order to cut expenditures, but failure to accept more substantial cuts provoked the resignation of the Finance Minister.

Belgium, in response to the acceleration of inflation and the need to
maintain the value of the Belgian franc within the EMS, a discount
rate increase, from 10.5 to 12 percent, was announced on February 27.
In Denmark the discount rate was increased from 11 to 13 percent on
February 18 because of higher foreign interest rates and the need to
preserve the Danish krone's position within the EMS.

The Swiss National

Bank also raised its discount rate, from 2 to 3 percent, on February
28, because of accelerating inflation (to a 5 percent annual rate) and
higher foreign interest rates.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 18, 1980 : Greenbook Part 2

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